Pound to Euro Rate Tumbles as Critics Savage November Budget

November 23, 2017 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Tumbles as Critics Savage November Budget

On Wednesday, the Pound saw a minimal rise against the Euro from an opening exchange rate of 1.1280 to close higher at 1.1270.

Pound Battered by Post-Budget Pessimism

While the November budget might have gotten a good reception from Conservative MPs on Wednesday, views outside the Commons have been rather less supportive.

This has led to widespread Pound losses, as GBP traders struggle to find a reason to buy into the Pound at the present time.

Soon after the budget was revealed, Office of Budget Responsibility (OBR) officials voiced their concerns;

‘The UK economy has slowed this year as households’ real incomes and spending have been squeezed by higher inflation.

The persistence of weak productivity growth does not bode well for the UK’s growth potential in the years ahead.

We have lowered our real GDP forecast in every year’.

Another more recent critic of the UK’s economic future has been Paul Johnson, Director of the Institute of Fiscal Studies (IFS).

Looking at possible changes in UK wage growth, Johnson said;

‘[The forecasts] now suggest that GDP per capita will be 3.5% smaller in 2021 than forecast less than two years ago in March 2016.

That’s a loss of £65 billion to the economy. Average earnings look like they will be nearly £1,400 a year lower than forecast back then, still below their 2008 level.

We are in danger of losing not just one but getting on for two decades of earnings growth.

Taking aim at the government’s strict spending limits, Johnson added;

‘Yet this is not the end of “austerity”. Not by a long chalk.

There are still nearly £12 billion of welfare cuts to work through the system, while day-to-day public service spending is still due to be 3.6% lower in 2022–23 than it is today.

Excluding health the cut for the rest of public services is over 6%.

To keep this spending constant in per capita terms spending would need to be £13 billion higher in 2022-23 than currently planned’.

Living standards have become a key focus for analysts, who believe that the persistent UK wage squeeze will bite even harder in the coming years.

Torsten Bell, Director of the Resolution Foundation has been focusing on this point, stating;

’Following years of incremental changes, yesterday the OBR handed down the mother of all economic downgrades pushing up borrowing for the Treasury.

While Philip Hammond chose to take a relaxed approach to additional borrowing, families are unlikely to do so when it comes to the deeply troubling outlook for their living standards that the Budget numbers set out.

Faced with a grim economic backdrop the chancellor will see this Budget as a political success. But that would be cold comfort for Britain’s families given the bleak outlook it paints for their living standards’.

Euro Turns Buoyant after Strong PMI Readings

In an opposite situation to the Pound, the Euro has been strongly supported by Eurozone domestic data today.

The single currency has made a 0.3% rise against the Pound, thanks in no small part to extremely positive Eurozone PMI stats.

Traders paid close attention to the German and Eurozone-wide readings, which both exceeded forecasts.

Summing up Germany’s figures, IHS Markit Principal Economist Phil Smith said;

‘The German economy is going great guns, with manufacturing enjoying one of the best growth spurts seen over the past two decades.

Businesses are inundated with new orders, including sharp growth in manufacturing export sales, which is powering a strong and sustained spell of employment growth’.

Meanwhile for the Eurozone PMI readings, Markit Chief Business Economist Chris Williamson was similarly optimistic, stating;

‘The message from the latest Eurozone PMI is clear: business is booming.

Growth kicked higher in November to put the region on course for its best quarter since the start of 2011.

The PMI is so far running at a level signalling a 0.8% increase in GDP in the final quarter of 2017, which would round-off the best year for a decade.

There are signs that political uncertainty appears to have subdued business optimism a little.

[However], the broad-based nature of the upturn, and the rate at which rising demand is feeding through to the labour market, suggests the Eurozone will see a strong end to 2017 and enter 2018 on a firm footing’.

Gloomy BoE Stability Report could Destabilise GBP/EUR Exchange Rate

The next high-impact UK news isn’t out until November 28th and unfortunately for the Pound, it could further weaken the GBP/EUR exchange rate.

This will be the Bank of England (BoE) financial stability report, which provides a snapshot of the current stability of the UK economy while also making a future forecast.

Given the recent data releases and post-budget negativity, it is not impossible that the BoE report will be pessimistic to the level that it triggers a GDP decline.

The Eurozone will still release significant data before the end of the week, with German confidence stats coming out on Friday.

The IFO business climate reading is tipped to decline in November, but perceptions of current conditions and future expectation scores are both predicted to rise.

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TAGS: Pound Euro Forecasts