Pound Sterling Watching UK Fiscal Policy Closely, GBP/EUR Braced

October 10, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Watching UK Fiscal Policy Closely, GBP/EUR Braced

The Pound to Euro (GBP/EUR) exchange rate found support below 1.19 on Tuesday and has settled around 1.1935, just below the middle of the trading range seen over the past 20 days.

Overall risk conditions will be very important in the short term with major global events in focus and the potential for high volatility across asset classes.

There will be further strong GBP/EUR selling interest above 1.20.

China is set to announce fiscal measures at the weekend while Middle East tensions remain intense.

According to ING; “Normally we would argue that the prospect of fresh Chinese fiscal stimulus would be a euro positive – given the eurozone's relatively large share of exports to GDP. However, the Middle East situation and the threat of higher oil prices is a large euro negative.

UK fiscal policy and ECB monetary policy will be key elements in the short term with the ECB council meeting next week and the UK budget at the end of the month.

ING commented; “The UK press is starting to reach a fever pitch with its speculation over what Chancellor Rachel Reeves will present in her first budget on 30 October. Critics argue that the budget should have been presented earlier, which would have prevented this policy void from being filled by other news.”

An immediate focus is whether the government will change the metric to calculate net debt which is a key element of the current fiscal rules.

According to think tanks, measuring the net worth or the net financial liabilities held by the government could give the chancellor room to borrow up to £50bn more than currently planned.”

A more modest move to remove Bank of England losses would potentially free-up £10-20bn.

Any change to the rules would be likely to allow increased capital spending.

Markets will inevitably be nervous over increased borrowing, especially given the 2022 Truss budget which triggered a collapse in gilts and the Pound.

ING added; “Investors remain on the lookout for any signs that the UK Gilt market is becoming nervous again about potential spending plans.”

There are strong expectations that the ECB will decide on another rate cut next week.

Scotiabank commented; “While ECB Governor Holzmann commented yesterday that the fight against inflation was not over, Nagel said earlier today that he is open to discussing a cut this month.”

According to ECB council member Villeroy; “A cut is very likely and it will not be the last one, the rhythm depending on how the fight against inflation evolves.”

Fellow member Stournaras added; "Even if we have one cut of 25 basis points now and another one in December, we will be back to just 3 per cent — still in highly restrictive territory.”

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TAGS: Pound Euro Forecasts