The pound has fallen sharply against the euro after the major political developments in the UK yesterday, which saw seven ministerial resignations with the potential for more. The Chief EU Brexit negotiator stated yesterday that there is still a long way to go for both sides, which indicates that there is still a lot more volatility ahead for the GBP EUR pair. President of the EU Council Donald Tusk has also confirmed that the EU emergency summit will now go ahead with the date set for 25th November, which would suggest added volatility around this time.
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The euro still faces a period of uncertainty after Italy rejected the proposals put forward by the EU commission to reduce Government spending in next year’s budget. In a sign of how tense relations are, the Italian Interior Minister Matteo Salvini stated this week “We won’t budge a millimetre.” Italy are still pushing to increase the budget deficit to 2.4% of Gross Domestic Product (GDP), much to the irritation of the EU Commission, which seeks to reduce Government expenditure. It's the first time the EU has ever rejected a budget in this way, and with relations already tense there could be further escalation. Deputy Prime Minister Luigi Di Maio has stated “If Brussels like our plan we’re happy, if not, we press forward.”
The fear is that if public debt spirals out of control, it would be a much worse outcome for Italy which in turn could prove negative for the single currency. Poor management of Italian finances could trigger another EU crisis and cause severe damage for the euro. Considering Italy is the fourth largest economy in the EU, the damage could be greater than the Greek Crisis in 2015 which saw rates for GBP EUR at highs of over 1.44. The EU will now look at punitive measures, including fines for breaching fiscal rules to halt Italy from pursuing this budget and it looks like a big battle awaits.
ECB President Mario Draghi will be making a speech this morning which could create some movement for the euro. EU Consumer Price Index data is released this morning which could influence the future path for the European Central Bank. A small drop in the inflation figure for October is expected which could see the euro come under a bit of pressure. Despite the huge asset purchasing scheme which finally comes to an end this year the EU economy has struggled with low inflation and weak growth.
A poor number today will only give cause for concern that the EU still faces an uphill battle to boost growth, and whether or not the economy can survive without more assistance form the European Central Bank going forward.
The German economy contracted in the last quarter, with official GDP numbers arriving at -0.2% this week which will of particular concern for the ECB. Clients looking to buy or sell euros with pounds should pay close attention to the latest developments in British politics surrounding Brexit.
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