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Pound Euro Exchange Rate Tax Cuts to Stretch UK Finances to Limit?

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GBP/EUR Exchange Rate Softens amid Hotter-than-Expected Eurozone Inflation

The Pound Euro (GBP/EUR) exchange rate is weakening this morning. Higher-than-expected Eurozone inflation was met with better-than-expected UK GDP growth.

At time of writing the GBP/EUR exchange rate is around €1.1329, a 0.32% fall from this morning.

Euro (EUR) Buoyed on rate Expectations amid Record-High Inflation

The Euro (EUR) is finding renewed strength against its peers today in the wake of Eurozone inflation hitting double digits for the first time. Following on from a hotter-than-expected CPI reading in Germany, the Euro area inflation rate hit 10%.

A fifth month in row of rising inflation, prices show little signs of peaking. Food, tobacco, and alcohol led the fastest increases, along with energy. Europe’s largest economy Germany recorded the highest CPI reading at 10.9%, whereas Spain and France both slowed.

Meanwhile, unemployment rate in the Euro area remained at 6.6%, a record low. Unchanged for the second consecutive month, it remained a record low reading. Combined with hotter-than-expected inflation, further rate hike expectations are bolstered.

Looking forward, further speeches from the ECB could inspire movement in the Euro if policymakers maintain a hawkish stance. A further jumbo rate hike could buoy investors and the Euro could see renewed strength.

Pound (GBP) Traded Erratically in Wake of Surprising Economic Growth

The Pound remained under pressure this morning despite the UK economy unexpectedly expanding 0.2% QoQ for Q2. An expected 0.1% contraction would have put the UK into a technical recession. However, underlying fears that a recession is coming is keeping a firm lid on any significant gains. The UK economy is still 0.2% smaller than pre-Covid levels, highlighting the continuing slowdown of economic growth.

Meanwhile, adding to the Pound’s pressure are mounting concerns from investors that the UK’s growing debt crisis could ruin the economy. In the wake of the sweeping tax cuts unveiled by Chancellor Kwasi Kwarteng, the ensuing market meltdown has eroded confidence.

Looking forward, the Office for Budget Responsibility (OBR) is set to deliver their initial forecast next week. Following on from an emergency meeting with Prime Minister Liz Truss and Kwarteng this morning, investors will be eagerly awaiting the forecast. A spokesperson for the OBR said:

‘(The forecast) will, as always, be based on our independent judgement about economic and fiscal prospects and the impact of the government’s policies.’

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