1.152 On UK PM Race, Where Next For GBP/EUR Buyers?

The Pound Euro (GBP/EUR) exchange rate traded in a wide range last week, heading lower overall, as political chaos rocked the Pound (GBP).

At the time of writing, GBP/EUR was trading at a nine-day low of around €1.1401.

Pound (GBP) Exchange Rates Volatile amid Political Chaos

The Pound initially surged higher on Monday after the new Chancellor, Jeremy Hunt, scrapped almost all of the unfunded tax cuts in the mini-budget that had sent markets into meltdown.

However, Sterling then shed these gains as investors began to speculate on how long Prime Minister Liz Truss would last in office.

In addition, there was some confusion about whether the Bank of England (BoE) would go ahead with its postponed sale of government bonds. After the BoE refuted reports of a further delay, a sell-off in the gilt markets pressured the Pound.

Wednesday saw Sterling waver lower after UK inflation exceeded forecasts. Rather than boosting BoE rate rise bets and supporting GBP, the hotter-than-forecast CPI only served to exacerbate fears about financial instability and the cost-of-living crisis in the UK.

After chaotic scenes in the House of Commons during a vote on fracking, GBP/EUR dropped at the open on Thursday morning. Sterling then rallied amid a recovery in government gilts and as Liz Truss resigned as UK PM.

But once again the Pound couldn’t hold its winnings. Although Truss’s departure was welcomed by markets, the ongoing political instability in the UK hammered GBP investor confidence.

On Friday, a larger-than-expected slump in UK retail sales once again put the UK’s dire economic situation in the spotlight. GBP/EUR fell to a nine-day low.

Euro (EUR) Exchange Rates Undermined as Ukraine Crisis Escalates

Meanwhile, the Euro (EUR) found its gains capped against the Pound throughout the week as the ongoing Russia-Ukraine war continued to escalate.

The conflict has seemingly entered a new stage ever since the Crimean Bridge attack in early October. Russia has been launching almost continuous rocket and kamikaze drone attacks on Ukrainian cities and energy infrastructure, killing civilians and causing power cuts ahead of the winter.

Mixed German data saw EUR wobble on Tuesday. German economic sentiment unexpectedly improved, although it remained close to multi-year lows.

Mid-week, the Eurozone’s final CPI printed lower than preliminary estimates. This seemed to slightly dampen European Central Bank (ECB) interest rate rise bets, thereby pressing EUR.

Russia-Ukraine woes weighed on the single currency through to the end of the week. Russia’s attacks continued, while more evidence that Iran was supplying Moscow with weapons and training emerged, raising fears of increased international tensions.

GBP/EUR Exchange Rate Forecast: UK Leadership and ECB Decision in Focus

The coming week kicks off with the flash PMIs for October. Expected contractions in both the Eurozone and the UK could weigh on both currencies, causing GBP/EUR to waver.

On Monday it will also be revealed which UK MPs have had enough nominations to progress to the second round of the leadership contest. Depending on who gets through and how many votes they get, Sterling could trade erratically. If Sunak is the only candidate to hit the 100-vote threshold and thus becomes PM, GBP could rally.

The remainder of the week is fairly sparse for UK data, so GBP investors will remain laser-focused on the Tory leadership contest. However, there are plenty of Eurozone events.

German consumer confidence, business climate, GDP and inflation could all cause movement in the Euro.

EUR investors will be focused, however, on the ECB interest rate decision on Thursday. Markets expect a 75-bp rate rise, which could boost the single currency. However, investors will be keen for hints about the bank’s next move. Hawkish rhetoric could see EUR climb.