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The Pound to Euro: Rate Tipped to 1.1500 on Tax Talk say ING

November 21, 2023 - Written by Tim Boyer


Foreign exchange analysts see scope for Pound Sterling gains against the Euro in the short-term outlook.

At the time of writing, the Pound to Euro exchange rate was trading at 1.1451.

Monetary and fiscal policy both have scope to provide limited net British Pound support in the near term.

Markets are confident that there will be personal tax cuts in Wednesday’s Autumn Statement while Bank of England officials, including Governor Bailey, have pushed back against expectations of rate cuts.

The Pound to Euro (GBP/EUR) exchange rate tested 6-month lows just above the 1.1400 level on Monday, but found significant buying interest and has rallied to around 1.1450 on Tuesday.

ING sees scope for GBP/EUR to rally further to 1.1500 in the short term.

UK public sector net borrowing excluding public sector banks increased to £14.9bn for October 2023 from £10.5bn the previous year and the second-highest October deficit on record.

For the first seven months of fiscal 2023/24, the deficit increased to £98.3bn from £76.4bn the previous year.

This was still £16.9bn less than forecast by the OBR, although the monthly shortfall was above OBR expectations.

Debt interest payments increased to £7.5bn for the month, the highest deficit for any October.

According to Ruth Gregory, deputy chief UK economist at Capital Economics, the government won’t be able to resist the temptation to unveil a pre-election splash.”

This won’t be a big fiscal loosening, rather a partial reversal of the planned tightening. And any pre-election splash in 2024 will almost certainly be followed by hefty tax rises in 2025 after the election.

From a longer-term perspective, she added; “This fiscal tightening in 2025 is another reason to think that when interest rate cuts occur they will be faster and larger than investors currently anticipate.”

According to Alison Ring, a director at ICAEW, “in reality, there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them."

KPMG senior economist Michael Stelmach added; "The short-term improvement in the fiscal position this year will likely prove unsustainable over the next five years."

He added; “there is a risk that such forecasts will prove unrealistic if they rely on consolidation plans which are subsequently not followed through. Indeed, borrowing has turned out higher than initially forecast in each of the past 20 years, underscoring the gap between fiscal pragmatism and political reality.”

MUFG noted expectations of tax cuts and added; “unless offset by spending cuts will act to reduce the BoE’s room to loosen monetary policy next year. The fiscal announcement could lift short-term UK yields and the pound.”

HSBC added; “For GBP, the implications for a fiscal stimulus at this point are likely to prove positive, particularly if the Chancellor can land the messaging as ‘pro-growth’ without somehow being ‘pro-inflation’ also. The risk of a repeat of last year’s market turbulence around the Autumn Statement is low.”

In comments on Monday, Bank of England Governor Bailey stated that it was much too early to be thinking about interest rate cuts and borrowing costs might need to increase again if there were signs that inflation was more persistent than expected.

In testimony to the Treasury Select Committee, Bailey also considered that risks to inflation and interest rates were still to the upside, especially given the tight labour market.

MPC member Mann pointed to survey evidence which suggested that pricing pressure will remain strong in 2024.

She continued to back further rate hikes.

The overall rhetoric from the committee was broadly hawkish.

The ECB has continued to push back against expectations of rate cuts in 2024, especially as looser financial conditions would risk triggering a fresh increase in inflation.

According to HSBC; “Rhetoric from all three central banks continues to signal a high-for-longer strategy, which the markets are choosing to ignore, preferring instead to anticipate a sequence of rate cuts that supports the “goldilocks” view.”

SocGen’s Kit Juckes sees scope for near-term Pound out-performance; “Short-term, I’d rather own GBP than EUR, on positioning, and even on talk of ill-advised tax cuts which could nevertheless delay rate cuts.”
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