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GBP/EUR Exchange Rate to Remain Volatile as IMF Weighs in on UK Tax Cuts?

GBP/EUR Exchange Rate Muted as Investors Digest IMF Statement?

The Pound Euro (GBP/EUR) exchange rate is trading narrowly today after the International Monetary Fund (IMF) raise concerns over the UK government’s tax cut plans.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1170, which has barely changed from this morning’s opening rate.

Pound (GBP) to Face Renewed Pressure Following IMF Critique?

Trade in the Pound (GBP) is mixed this morning as investors digest a statement from the IMF criticising the UK’s planned tax cuts.

The IMF’s says that the tax cuts risk undermining the efforts by the Bank of England (BoE) to tackle inflation.

A spokesman for IMF said this morning that:

‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy’.

The IMF’s statement will affirm concerns already voiced by markets, who sent the GBP/EUR plunging to a new two-year low at the start of the week.

Coming up a speech from BoE policymaker Swati Dhingra could help shore up the Pound if she strikes a broadly hawkish tone.

Euro (EUR) Supported by ECB’s Lagarde

The Euro (EUR) is finding some support this morning in response to a speech by European Central Bank (ECB) President Christine Lagarde.

Investors are expecting the ECB to continue with their aggressive monetary policy tightening in their October meeting. Lagarde’s speech maintained this view, where she stated:

‘I gave a little forward guidance by saying that after 125 bp hikes that there will be more hikes in the next several meetings.’

‘We are not at the neutral rate yet.’

Whist the initial reaction to Lagarde’s was mixed, it’s likely the Euro could find further support as investors digest the news. Driven by hawkish comments investors could begin to price in a 75bps hike for the ECB’s next monetary policy meeting.

Meanwhile, a lack of numerical data could see EUR investors turn to headlines. Any news from Ukraine could create impetus for the single currency as amid fears of an escalation of the conflict following the ‘sham’ referendums held in territory controlled by Russia.

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