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Pound Sterling vs Euro Exchange Rate Slumps despite Italy Budget Row

November 21, 2018 - Written by John Cameron

GBP/EUR Exchange Rate Slumps despite Italian Tensions Intensifying

The Pound Sterling Euro (GBP/EUR) exchange rate has made an unsuccessful attempt to push back today with the Pound falling to an inter-bank rate of €1.1214.

Brussels has escalated its row with Rome over Italy’s 2019 budget, stating that its plan to stimulate their economy through increased borrowing is a breach of European Union budget rules, and would backfire on businesses and the state.

Italy’s Deputy Prime Minister, Matteo Salvini, has stated that they would ‘respond politely’ to the European Commission (EC), adding sarcastically:

‘Has the letter arrived? I was also waiting for a letter from Santa Claus. We will discuss it politely as we always have. We will exchange opinions. I will continue. If someone wants to persuade me that the pension reform was right I will not be persuaded.’

Brexit remains a catalyst for volatility in Sterling as UK Prime Minister Theresa May still faces challenges made over her leadership, with the opposition Labour Party leader Jeremy Corbyn stating:

‘If the government can’t negotiate an alternative then it should make way for those who can and will.’

May responded, saying:

‘He is opposing a deal he hasn't read, he's promising a deal he can't negotiate, he's telling Leave voters one thing and Remain voters another - whatever [Mr Corbyn] will do, I will act in the national interest.’

GBP/EUR Exchange Rate Attempts to Strengthen on Back of Carney’s Commons Address

As the subject of Brexit once again dominates UK and European headlines, the Governor of the Bank of England (BoE), Mark Carney, showed his support yesterday when addressing Parliament’s Treasury Select Committee.

Carney stated:

‘We have emphasised from the start the importance of having some transition between the current arrangements and the ultimate arrangements […] So we welcome the transition agreements in the withdrawal agreement’

Carney stressed that having a deal was essential and the transition period is key as it will provide more certainty for businesses, with a no-deal Brexit causing ‘uncomfortably high’ risks for the economy and Sterling.

Carney and other BoE officials repeated warnings to investors not to assume that the central bank would respond to a no-deal Brexit by cutting interest rates, also emphasising they have been preparing for such a situation since June 2016.

GBP/EUR Exchange Rate Fall despite Defiant Italy Refusing to Budge

Tensions over Italy’s draft budget continue to cause trouble with one of the potential consequences for Italy being a fine of 0.2% GDP.

European Commission Vice-President Valdis Dombrovskis warned about the dangers inherent in the situation:

‘With what the Italian government had put on the table, we see a risk of the country sleepwalking into instability.’

He added that a disciplinary measure known as ‘excessive deficit procedure’ was now an appropriate measure to take out against Italy.

The start of this week’s trading session saw the Euro make gains on the Pound as construction output data released showed the Eurozone had increased 4.6% in September compared to September of last year.

GBP/EUR Exchange Rate Set to Remain Volatile

With Theresa May’s premiership still being challenged by MPs calling for a vote of no-confidence, the UK currency could remain volatile for some time to come.

With May set to head to Brussels as the EU has missed its deadline of Tuesday to complete the text of its declaration on its future relations with the UK, concerns were raised by a number of member states, the spotlight will remain pointed at Brexit.

Adding to the sense of growing crisis at the EU level, Italian Deputy Prime Minister Matteo Salvini declared that he was ready to ‘confront Juncker, Moscovici or whoever,’ suggesting that there will be continued tensions between Brussels and Rome for the foreseeable future.

It seems that both sides are unlikely to back down which could cause problems for the single currency, with the Italian Prime Minister, Giuseppe Conte insisting that the 2019 budget is ‘excellent’.

Andrew Balls, PIMCO’s chief investment officer for global fixed income suggested that Rome could issue a parallel currency, or return to the lira, stating:

‘Italian sovereign default is unlikely but it is not a zero probability. The more plausible scenario is a combination of issuing a parallel currency or even redenomination.’

Mr Balls added that he did not see much scope for the European Central Bank (ECB) to raise interest rates in 2019, a sentiment that if taken on board by investors will continue to cast a long shadow over EUR rates.

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