GBP EUR Exchange Rate Rally Comes to an End as Markets Worry about UK Public Finances

November 22, 2016 - Written by Tim Boyer

STORY LINK GBP EUR Exchange Rate Rally Comes to an End as Markets Worry about UK Public Finances

The GBP/EUR exchange rate has dipped after yesterday’s advance as markets reacted poorly to predictions that Britain’s public borrowing will overshoot the original £55billion target predicted in March’s Budget.

Pound Euro (GBP EUR) Exchange Rate Drops on Public Sector Borrowing Concerns

The Pound Sterling to Euro (GBP/EUR) exchange rate began to slide this morning despite an impressive drop in Public Sector Borrowing.

Figures showed that borrowing made a significant improvement from £9.2billion to £4.3billion in October, beating expectations that it would only drop to £6.0billion. However this was not enough to offset the negative sentiment caused by predictions that Britain’s borrowing would be around £11billion higher this financial year than predicted in March’s Budget. As Martin Beck, senior economic advisor to the EY ITEM Club explained.

‘The stronger October outturn and some favourable revisions to prior months meant that borrowing was £5.6bn lower than a year earlier over the first seven months of fiscal year 2016-17. But this still leaves the Government behind schedule in terms of achieving the OBR’s full year forecast. If this trend continues over the remaining five months of the year then borrowing would overshoot by around £11bn.’

This is likely to cause investors to worry about tomorrow’s Autumn Statement when UK Chancellor Philip Hammond is expected to announce that the government will miss its original target to balance the budget by 2020 as he gives more room for public spending to help deal with the fallout of 'Brexit'.

Eurozone Consumer Confidence

The Euro was also bolstered by a better than expected rise in the latest Eurozone Consumer Confidence report as it rose from -8 to -6.1 in November, rocketing past forecasts of a modest rise to -7.6.

This is the report’s best reading since December 2015 and is the largest monthly increase since May after the UK vote for 'Brexit' caused a rise in consumer uncertainty. It has also helped to improve prospects for future growth in the European economy as The Chief European and UK economist at IHG Markit, Howard Archer elaborated;

‘This buoys hopes that the Eurozone is on course for improved GDP growth in the fourth quarter after expansion was limited to 0.3% quarter-on-quarter in both the third and second quarters.’

GBP EUR Exchange Rate Forecast: UK Autumn Statement Scheduled for Wednesday

The GBP EUR exchange rate, is likely to witness some increased volatility ahead of tomorrow’s Autumn Statement as investors become increasing concerned over a rumoured £100billion ‘black hole’ in public finances.

Meanwhile Europe will be gearing up for the release of Markit’s latest Eurozone PMI data tomorrow, which includes Germany’s Manufacturing and Services PMIs, which may cause the Euro to slump if current forecasts of a slight decline transpire. This is likely, as manufacturing is predicted to fall from 55.0 to 54.7 and services to slide from 54.2 to 53.6 in November.

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TAGS: Pound Euro Forecasts