EUR to GBP Exchange Rate Sheds Recent Gains Ahead of UK Autumn Budget

November 21, 2017 - Written by David Woodsmith

STORY LINK EUR to GBP Exchange Rate Sheds Recent Gains Ahead of UK Autumn Budget

Due to political uncertainty in Germany, as well as hopes for progress in the Brexit process and market anticipation for the upcoming UK Autumn Budget, the Euro to British Pound exchange rate has shed much of its recent gains.

Last week saw the EUR GBP exchange rate climb from 0.8843 to 0.8922. The pair has slipped since Monday though and as of Tuesday afternoon was trending near the level of 0.8850 again.

EUR Lacks Strength as German Political Uncertainty Weighs

On Monday morning, the Euro was sold against most major currencies after it emerged that German Chancellor Angela Merkel’s coalition talks had collapsed.

This caused fresh uncertainty in the Eurozone’s strongest economy and some analysts became concerned that it could lead to a snap election or potentially even the end of the Merkel-era.

However, as German President Frank-Walter Steinmeier urged Merkel and German parties to try and come to some kind of agreement and form a government, the Euro steadied.

Investors are now waiting for further developments in German politics before making any big moves on the shared currency.

For example, the situation could resolve itself with a minority government or a coalition could be formed after all. Both of these outcomes would leave Merkel in power, which markets are hoping for.

According to Esther Reichelt, currency strategist at Commerzbank;

‘The worst case scenario is that the German political process will take a little more time to resolve but markets are not expecting anything extraordinary to come out of this and the bigger picture is that the economy is performing well,’

The Eurozone’s strong economic outlook is indeed limiting Euro losses and keeping the shared currency relatively sturdy despite political uncertainty and cautiousness from the European Central Bank (ECB).

Following last week’s strong Eurozone Q3 growth projections, Tuesday saw the publication of some strong Spanish industrial orders and trade balance results from September.

GBP Supported by Budget Anticipation

Despite some underwhelming UK deficit data on Tuesday, the Pound saw relatively sturdy trade on Tuesday. Investors firmed in the currency ahead of UK Chancellor Philip Hammond’s anticipated Autumn Budget presentation on Wednesday.

Markets speculate that the Budget could include some kind of relief for consumers amid the pay squeeze that has impacted households for most of the year.

As UK inflation surges and wage growth fails to keep up, this has dampened spending power in Britain’s heavily consumer-facing economy.

Still, markets became a little less optimistic for Hammond’s Budget on Tuesday following an underwhelming UK public sector net borrowing report from October.

The borrowing report was forecast to worsen slightly from £-5.33b to £-6.6b, but instead came in at a worse than expected £-7.46b. Excluding UK banking groups the borrowing deficit came in at around £-8b.

Investors remained overall hopeful ahead of the Budget though. Markets were also encouraged by news that the UK government had agreed to raise its ‘divorce bill’ offering to the EU, which could help accelerate Brexit negotiations.

EUR/GBP Forecast: UK Budget in Focus

Potential new fiscal policy announcements at the UK Autumn Budget presentation on Wednesday could drive Pound movement in the coming days, and could see EUR/GBP losing ground.

If UK Chancellor Hammond announces any new measures to give a boost to the UK economy or to consumers, Sterling could see stronger demand.

However, if the Budget contains little in the way of new or optimistic policy, Sterling could fall limp and EUR/GBP could recover some of this week’s losses.

Euro investors, on the other hand, are likely to keep a close eye on the political situation in Germany.

Any developments suggesting that a government could still be formed about Chancellor Angela Merkel would make the Euro more appealing again. On the other hand, signs that a new election could be called would lead to a Euro plummet.

Notable ecostats due in the coming days, such as Eurozone consumer confidence, PMIs and Britain’s Q3 Gross Domestic Product (GDP) projections could also influence EUR/GBP exchange rate movement.

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TAGS: Euro Pound Forecasts