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Pound Euro (GBP/EUR) Exchange Rate Tumbles as ECB Surprises with 0.5% Rate Hike

European Central Bank

Pound Euro (GBP/EUR) Exchange Rate Falls after ECB Rate Hike

The Pound Euro (GBP/EUR) exchange rate is plummeting today after a surprise 0.5% interest rate hike from the European Central Bank (ECB). An above-forecast rise to UK government borrowing may also be pushing the currency pair lower.

On the other hand, a potential Eurozone energy crisis and political turmoil in Italy could be underpinning GBP/EUR today.

At time of writing the GBP/EUR exchange rate is at around €1.1666, which is down roughly -0.7% from this morning’s opening figures.

Euro (EUR) Leaps after Surprise 0.5% ECB Rate Hike

The Euro (EUR) is soaring against its peers today after the European Central Bank rose interest rates by 0.5%. The central bank rose interest rates for the first time since 2011.

The move surprised investors as most had been pricing in a 0.25% rate hike. The ECB signalled that further rate hikes could be ‘appropriate’, and that Thursday’s 0.5% hike would allow it to make future decisions on a ‘meeting-by-meeting’ basis.

The single currency could see potential gains capped amid Eurozone recession fears, however. Worries over a potential energy crisis across Europe have continued to grow. Today saw Russia reactive the Nord Stream 1 gas pipeline but with a restricted output of 40%.

Political turmoil in Italy may also be weighing on EUR today. Italian Prime Minister Mario Draghi resigned earlier today after the collapse of the country’s coalition government. Italy now faces the prospect of an early election and uncertainty in its financial markets.

Pound (GBP) Slips as UK Government Borrowing Beats Forecasts

The Pound (GBP) is dropping today after figures indicated that UK government borrowing was worse than previously forecast. High inflation pushed government borrowing to £22.9B in June.

The figures were above previous forecasts from the Office for Budget Responsibility (OBR) and represented the highest point since April 2021. The soaring deficit is likely weighing on Sterling today and adding to the UK’s poor forward outlook.

The UK’s current political instability may also be limiting bets on the currency today. The Conservative leadership contest has narrowed to the final two candidates: Rishi Sunak and Liz Truss. The Pound may be underpinned by expectations of 0.5% interest rate hike at the Bank of England’s (BoE) August meeting, however. BoE Governor Andrew Bailey signaled on Wednesday that a higher rate hike was ‘on the table’ for the central bank’s next meeting.

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