The pound falls after the huge support plan presented by the British government
The EUR/GBP exchange rate could continue to recover in the coming weeks, as the Bank of England (BoE) relaunches an asset purchase program (QE). The BoE has just announced that it will temporarily buy long-term British Gilts, presumably to slow the rise in rates which exploded after the presentation of a package of support measures from the British government.
Britain’s 10-year yield rose to its highest level since 2008 at 4.5% this week after new Prime Minister Liz Truss announced a huge bailout package aimed at reducing the impact of the crisis energy and lower taxes for businesses and households.
The cost of measures to reduce the impact of the energy crisis has been assessed at £60 billion for 6 months only, while tax cuts are estimated at £50 billion. All this should force the United Kingdom to borrow an additional 72 billion pounds on the markets, which worries operators as evidenced by the surge in bond rates and the fall of the pound.
The Bank of England’s decision aims to slow the rise in UK long rates, but the impact on the pound is more uncertain, as at the same time the central bank is expected to continue raising its key rates in future meetings in order to to curb galloping inflation.
The real catalyst for the pound’s recovery would be a downward revision of the support measures presented by Liz Truss. This would reassure international investors, which should benefit the pound and the UK bond market.
EUR/GBP weekly price chart – key levels