GBP/EUR Exchange Rate Opens Higher

The Pound Euro (GBP/EUR) exchange rate surged to a one-month high last week as the UK government U-turned on its plans not to raise corporation tax from 19% to 25%. However, political turmoil saw Sterling trim its gains.

At the time of writing, GBP/EUR was trading at around €1.1508, up from the week’s opening level of around €1.1393 but down from the one-month high of €1.1611.

Volatile Pound (GBP) Exchange Rates Rise as Truss U-Turns Again

The Pound (GBP) ticked higher against the Euro (EUR) at the start of last week’s trade as Chancellor Kwasi Kwarteng brought forward the publication date of his medium-term fiscal plan and independent forecasts from the Office for Budget Responsibility (OBR).

Since Kwarteng unveiled huge unfunded tax cuts in September, which sent UK markets into meltdown, he has faced intense pressure to clarify how the Treasury will balance the books.

GBP/EUR initially firmed on Tuesday as the Bank of England (BoE) widened its emergency bond-buying scheme, which has helped stabilize markets in the wake of the mini-budget. However, on Tuesday night BoE Governor Andrew Bailey said the bank would not extend the intervention beyond the planned Friday deadline. Sterling slide in response.

GBP rebounded the following day, despite an unexpected 0.3% contraction in UK GDP, amid speculation that the BoE may be willing to extend its intervention anyway, if market conditions require it.

Sterling then skyrocketed to a one-month high on Thursday amid reports that Liz Truss was planning another huge U-turn on her fiscal plans. Sources speculated that the government would go ahead with Rishi Sunak’s planned rise in corporation tax, despite Truss vowing to scrap the move as part of her leadership bid.

Friday saw GBP/EUR pare its gains. Although Truss did announce the expected U-turn, she also sacked Kwasi Kwarteng. This raised questions over whether the PM herself would resign or be forced out in the next week, leading to yet further political instability. However, the Pound Euro pair retained a goodish portion of the week’s gains.

Euro (EUR) Exchange Rates Pressured as Russia-Ukraine Crisis Escalates

At the same time, the Euro stumbled out of the gates last week as the Russia-Ukraine war escalated. Following an attack on the Kerch Bridge – a symbolic structure that connects mainland Russia with annexed Crimea – Russian forces launched a barrage of deadly missile strikes at Ukrainian cities.

EUR continues to slip on Tuesday as Russia-Ukraine worries persisted. However, a pullback in the US Dollar (USD), with which EUR is negatively correlated, limited the Euro’s losses.

Although Eurozone industrial production rose more than forecast in August, the single currency remained under pressure. Worries grew around the Zaporizhzhia nuclear power plant, which suffered multiple power outages. Officials were concerned about the nuclear safety of the plant.

Thursday brought a small respite for the Euro, as Ukraine’s allies pledged to supply air defenses and the overwhelming UN voted to condemn Russia’s annexation of Ukrainian territory. However, this wasn’t enough to protect the single currency from Sterling’s surge.

EUR was able to recoup some losses on Friday amid the UK’s political turmoil, but it remained down on the week.

GBP/EUR Exchange Rate Forecast: More Big Swings Ahead?

Looking at the week ahead, high-impact data and further political developments could see more big swings in the Pound Euro pair.

In the UK, the big release is the UK’s September inflation rate reading due out on Wednesday. Economists expect the UK CPI to have risen back to 10.1% last month. An increase in inflation could prompt Bank of England interest rate rise bets, which could then boost Sterling.

On Friday, however, UK retail sales are forecast to have contracted once again. If so, it would be a further indication that the country is sliding into a recession. As such, GBP could end the week on a sour note.

Meanwhile, UK politics could drive significant movement. Although Truss has sacked Kwarteng as Chancellor and reversed large parts of the mini-budget, the ruling Conservative Party remains in turmoil and the UK economy is in a troubling situation. If Number 10 can move forward with decisiveness, GBP could firm; if uncertainty and instability remain, Sterling may fall.

As for the Euro, an expected decline in German economic sentiment on Tuesday could hurt EUR. Otherwise, Russia-Ukraine news may drive the single currency.