October 28, 2024 – Written by Tim Boyer
STORY LINK Pound Sterling Edges Lower vs Euro, Dollar Ahead of UK Budget
The Pound to Euro (GBP/EUR) exchange rate has drifted just below the 1.2000 level. Oil prices slumped on Monday as the Israeli strike on Iran avoided oil infrastructure, and this provided net Euro support in global markets.
Domestically, markets will be focussing on the crucial UK budget.
Rabobank is wary over near-term fiscal risks, but still expecting net longer-term Pound gains; “our central view remains that EUR/GBP will continue to edge lower to the 0.8150 area on a 12-month view.” (1.2270 for GBP/EUR).
The government has confirmed that Employer National Insurance Contributions will be increased in Wednesday’s budget.
Markets also expect changes to Capital Gains Tax and Inheritance Tax with notable tightening.
Reeves is likely to change fiscal rules and target public sector net financial liabilities, replacing the current target of public sector net debt.
According to the Institute for Fiscal Studies such an approach would give the government an extra £53bn to borrow and allocate to investment.
Markets remain sensitive to borrowing levels following the 2022 mini budget.
Andrzej Szczepaniak, vice president of European economics at Nomura commented; “Is this going to be a Liz Truss moment? We don’t think so whatsoever.”
He added; “Actually, now the government can carve out investment. That’s actually fairly positive for the U.K. economy. It has a long structural underinvestment situation versus its peers in the G7.”
Rabobank sees a balancing act; “The obvious problem is that UK public sector finances are in a poor state of health, with debt very close to 100% of GDP. PM Starmer has proclaimed that it is fine to borrow in order to invest. The market, however, is likely to be the judge of that. Chancellor Reeves is walking a thin line as she seeks to find a balance between finding the funds to invest while also maintaining the air of budgetary prudence.”
Rabobank added; “GBP is holding up well so far, in part because the BoE is not as dovish as some other G10 central banks, but the weeks ahead could still test GBP’s resilience. That said, on balance, we continue to expect EUR/GBP to continue its slow grind lower medium-term, as the more dovish ECB exposes the EUR to Germany’s structural issues.”
Fiscal concerns have had some impact on Pound sentiment.
The latest Lloyds Business Barometer retreated to 44% in October from 47% previously, although it remained above the long-term average.
Hann-Ju Ho, senior economist at Lloyds Commercial Banking, commented; “Although overall business confidence dipped in October, it follows a sustained period of significant optimism, and business sentiment remains above historical levels.”
She added; “Encouragingly, many businesses remain confident in their own trading prospects, and the increase in hiring intentions suggests more employers want to grow their workforce.”
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TAGS: Pound Sterling Forecasts
