GBP
In a widely expected move, the Bank of England cut interest rates by 25 basis points to 4.75% last Thursday 7th November. This was the year’s second base rate cut after dropping from 5.25% to 5% in August.
With the US Dollar bolstered by the prospect of a Donald Trump presidency, the GBP/USD exchange rate had initially dipped by around 1.5%, but it recovered following the Bank of England’s decision. The BoE suggestion that Labour’s recent Autumn Budget could be inflationary over time contributed to the rally. As traders concluded that interest rates might not drop as quickly as previously thought, the value of GBP was boosted.
However, the strength of the dollar has continually pushed GBP/USD lower over the past week. UK GDP was released this morning, coming in below expectations at 0.1% quarterly growth, which saw the pound weaken further. GBP/USD has now dropped to a 5-month low, and GBP/EUR has also slipped further away from its recent high.
EUR
In a surprise announcement last week, German Chancellor Olaf Scholz removed his finance minister, undermining the governing coalition. Government insiders thought that Donald Trump’s return to the White House might force leaders of the Social Democrats, Greens, and the FDP to recognise the need for unity. However, the discord and rancour in Berlin appeared to show no signs of subsiding, and the collapse of the coalition government has thrown Europe’s largest economy into turmoil.
Chancellor Scholz later announced that his government would face a confidence vote on the 16th December, with parliamentary elections also brought forward from the scheduled date in September to 23rd February. This news contributed to the Euro’s existing problems, with EUR/USD languishing at its lowest level since June and GBP/EUR hitting a 31-month high, a level seen only twice since 2016.
While it would be nice to suggest that the era of uncertainty is over and plain sailing lies ahead, the level of uncertainty for people and businesses across the globe seems to be increasing. Any further destabilisation of the eurozone will likely have a significantly negative impact on the Euro.
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.
