EUR/GBP has slipped below 0.84 to around 0.8389 on Wednesday morning as stronger UK price pressures reinforce Sterling’s interest-rate support.
British headline inflation reached 3.5% in September, while the rise in services inflation makes the increase harder to dismiss as an energy-only shock.
Tuesday’s fall in UK unemployment to 4.7% had already strengthened the Pound, although vacancies declining to 691,000 caution against assuming that hiring is broadly accelerating.
Germany’s October ZEW survey gave the Euro little help, with expectations falling to 28.1 even as assessments of current conditions improved.
ZEW attributes the weak outlook for consumption and investment to expensive energy, which reduces household purchasing power and raises companies’ costs.
French fiscal concerns add a separate obstacle to a Euro recovery, particularly if investors reduce exposure to the region rather than merely switching between its bond markets.
Britain’s finances nevertheless remain vulnerable, with borrowing in the first half of the financial year running GBP6 billion above the official forecast.
Morgan Stanley remains constructive on the UK’s gradual fiscal consolidation but estimates that the Budget may need GBP5 billion-GBP10 billion of revenue measures to restore financial headroom.
Tax increases could reassure lenders while weakening demand, creating a possible route for the Euro to recover if the growth cost weighs on Sterling.
Our December forecast average is 0.8660, about 3.2% above the latest rate across 21 providers, so the anticipated rebound has become more substantial as the Euro has fallen.
EUR/GBP remains below its 21-day, 50-day and 100-day exponential moving averages, leaving that recovery unsupported by the current technical trend.
The UK’s 28 October Budget precedes the ECB’s 29 October decision, giving investors successive tests of British fiscal credibility and European interest-rate policy.
Mid-market reference rate. Customer rates normally include provider margins and fees.
