8 Oct, 2022 @ 14:52
3 mins read

Currencies direct: GBP/EUR exchange rate crashes as UK mini-budget triggers run on the pound before rebounding

mark rickard

AFTER stumbling through the second half of September, the pound euro (GBP/EUR) exchange rate then collapsed at the end of the month following the UK government’s mini-budget.

Over the last two weeks, GBP/EUR slumped from €1.156 to a two-year low of €1.087, before recovering some losses and wavering at around €1.118. It has since bounced back after the UK government and Bank of England moved to reassure the markets.

What’s been happening?

After slipping to a 17-month low in mid-September following a larger-than-forecast slump in UK retail sales, the pound euro exchange rate started to inch higher once again.

Expectations of a 75-bp interest rate rise from the Bank of England (BoE) gave Sterling some support, although thin trading conditions due to a lack of data and the Queen’s funeral meant GBP movement was limited.

Meanwhile, the single currency came under pressure as Russia escalated its invasion of Ukraine. Four Russian-occupied territories in Ukraine announced plans to hold referenda on joining the Russian Federation, then Vladimir Putin announced a partial mobilisation and threatened the use of nuclear weapons.

The pound’s upside was stopped short as the BoE opted for a half-point hike, rather than the three-quarter-point move markets had been expecting.

The following day, Chancellor Kwasi Kwarteng unveiled his ‘mini-budget’, announcing £45bn in unfunded tax cuts – the biggest tax-cutting event in 50 years. The prospect of unmanageable levels of government debt, rampant inflation and soaring interest rates sent UK markets into meltdown, with GBP/EUR plummeting to a 19-month low.

Sterling briefly hit a two-year low against the single currency – and an all-time low against the US dollar – on the last Monday of September before recovering some ground amid speculation of an emergency rate rise from the BoE.

The pair then wavered in this region through much of the last week of September, with Sterling exhibiting bouts of volatility. While the BoE did not enact an unscheduled rate rise, it did step in with an emergency bond-buying programme to staunch the sell-off in government bonds, helping the Pound recoup some losses.

In addition, growing tensions between Russia and the West maintained pressure on the euro, thereby supporting GBP/EUR. However, Sterling remained weak.

What do you need to look out for?

Economic data is fairly thin through the first week of October, so headlines around the Russia-Ukraine crisis and the volatility in UK markets could drive most movement in the pound euro pair.

Whether the Bank of England’s intervention in financial markets is enough to bring about stability remains to be seen. If the bank’s plans fail to alleviate concerns, it may be forced to act again, perhaps with an emergency rate hike, although there is very little appetite for this at Threadneedle Street.

Investors will be keeping a close eye on any rumours or announcements from both the Treasury and the BoE. The outlook remains incredibly uncertain, meaning there’s a high risk of volatility in the pound.

At the same time, if the Russia-Ukraine war continues to escalate then the euro may face more headwinds. A renewed Russian offensive, further sanctions, or signs that the conflict is spreading beyond Ukraine’s borders could all spell trouble for the single currency.

As we approach the middle of October, some high-impact UK data could prompt GBP/EUR movement. Traders will be watching the latest labour market and GDP reports closely. Any more signs that the UK economy is faltering will likely add to the intense pressure on the pound.

Protecting against volatility

This kind of volatility can cause some nasty surprises if you need to transfer money overseas. On a £200,000 transfer, that four-cent gap between €1.15 and €1.11 translates to an €8,000 difference. And the larger the sum, the higher the discrepancy.

Fortunately, there are ways that you can protect against volatility.

Specialist currency brokers, such as Currencies Direct, offer different tools to help you navigate the ups and downs of the currency market.

For instance, you can use a forward contract to secure an exchange rate for up to a year. This way, you won’t lose out if the market moves against you.

Services like rate alerts and daily updates make it easy to keep track of what’s going on in the forex world so that you can make informed decisions. And with Currencies Direct you’ll have a dedicated account manager there to provide guidance and support whenever you need them.

At Currencies Direct we’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Since 1996 we’ve helped more than 325,000 customers with their currency transfers, just pop into your local Currencies Direct branch or give us a call to find out more.

For more information visit: https://www.currenciesdirect.com/en

Find you local office in Spain here.

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