Pound to Euro Firm Around 1.168 Ahead of the 2024 UK Spring Budget

March 5, 2024 - Written by John Cameron

STORY LINK Pound to Euro Firm Around 1.168 Ahead of the 2024 UK Spring Budget

The Pound to Euro exchange rate (GBP/EUR) briefly dipped to 10-day lows near 1.1660 on Friday before a tentative recovery and traded around 1.1685 on Monday.

Two key events this week will be the UK budget on Wednesday and ECB policy meeting on Thursday.

The shaping of the fiscal and monetary debate by the UK government and ECB will have an important impact on financial markets and help determine whether GBP/EUR can break out of narrow ranges.

UK fiscal credibility could be a crucial element.

BoA did note some concerns; “given recent press reports we worry about potential announcements that deliver more ambitious tax cuts now on the back of backloaded and very politically challenging real expenditure cuts in the future.”

It added; “The government has already pencilled in a 1% annual real terms spending increase for all departments. Going further in that direction ahead of an election could clearly question credibility.”

ING also considers that financial markets will be fragile; “The scars of Liz Truss’ tumultuous budget in 2022 have not entirely healed, and markets will likely be very sensitive to the funding aspect of the budget. The implications of new measures obviously extend to the Bank of England rate expectation path.”

According to the bank; “A moderately-sized tax relief package (i.e., one that does not trigger gilts turmoil) can probably give some support to GBP this week, but the spectrum of possibilities is admittedly quite wide.”

HSBC notes the potential for the Chancellor to be more aggressive; “these events often contain a few surprises, and this is an election year. As we argued in our preview, the Chancellor will likely want to do as much as he can, without risking another ‘mini budget’ type event, even if it means pencilling in big spending cuts down the line.”

Bank of America also expects an impact on monetary policy. According to the bank; “Given our expectation of additional measures we think the Budget will be mildly inflationary, adding another reason for the Bank of England to be patient and cautious when starting a cutting cycle.”

The bank expects that the first rate cut will come in August.

In contrast, MUFG sees a potential negative Pound impact if a cautious stance brings forward a potential rate cut; “It is unlikely that the government’s budget will significantly impact the performance of the UK economy in the year ahead. At the margin, it makes it slightly more likely that the BoE could begin to cut rates sooner in June rather than waiting until August which is a negative development for the pound.”

In a speech on Friday, Bank of England Chief Economist Pill stated that monetary policy could still be restrictive even if Bank Rate was cut from its current 16-year highs.

Nevertheless, he added; “Nonetheless, in my baseline scenario the time for cutting Bank Rate remains some way off.”

The ECB will announce its policy decision on Thursday with no real chance of a rate cut.

According to HSBC; “The ECB is likely to keep its policy rate unchanged at the March meeting and maintain its data dependent stance. Although the meeting may lack substantial developments, investors will scrutinize the communication closely for any guidance on the timing of the first cut, and subsequent pace of easing.”

MUFG commented; “Without a dovish catalyst, ECB officials have indicated recently that they are willing to wait until June to begin cutting rates when they will have more information over whether wage growth slowed further at the start of this year. A development which is helping to ease downside risks for the euro in the near-term.

Goldman Sachs has shifted the timing of the first cut; “Under our economists’ newly upgraded inflation forecasts off the back of this print, it seems unlikely that the ECB will want to set the stage for cuts just yet – we now expect the first ECB rate cut in June.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts