Pound to Euro Exchange Rate: EUR Buyers See 6-Week Best Rates

January 24, 2024 - Written by Ben Hughes

STORY LINK Pound to Euro Exchange Rate: EUR Buyers See 6-Week Best Rates

The combination of stronger-than-expected UK government borrowing data and benign risk conditions have underpinned the Pound in global markets.

The Pound to Euro exchange rate posted a marginal 6-week high at 1.1690 as markets priced in larger tax cuts ahead of the March budget.

GBP/EUR, however, was unable to make a decisive break above 1.1690 and the UK currency has hit resistance here for the last four sessions.

There will be an element of caution ahead of Thursday’s ECB policy meeting which may underpin the Euro but, before then, the business confidence data will be released on Wednesday.

A stronger absolute and relative reading for UK PMI business confidence data would be likely to trigger further Pound gains.

Ahead of the Euro-Zone PMI data Goldman Sachs commented; “we expect the Euro headwinds to be on display over the next few weeks, and arguably under this framework the PMI and inflation reports should be more important than the likely steadfast message from the ECB.”

The latest UK data recorded a decline in the December government borrowing requirement to £7.8bn from £16.2bn the previous year and the lowest December deficit since 2019.

The monthly deficit was also notably below consensus forecasts of £11.4bn.

For the first nine months of fiscal 2023/24, the deficit still widened to £119.1bn from £108bn the previous year, but this was almost £5bn less than the OBR forecast for the period.

There was a sharp decline in the debt interest payments to £4.0bn from £18.1bn the previous year.

There was a significant increase in tax receipts for the month and the lower than expected deficit will increase estimates of the potential UK headroom for Chancelor Hunt ahead of the March 6th budget.

Capital Economics economist Ruth Gregory noted; “After nine months of the 2023/24 fiscal year, borrowing is on track to undershoot the OBR’s full-year borrowing forecast of £123.9bn by £5.0bn.”

She added; “What’s more, with market interest rate expectations and long-dated gilt yields having fallen since November, we suspect the OBR will revise down its borrowing forecast significantly from 2025/26. That may provide the Chancellor with “headroom” against his fiscal mandate of about £20bn in the Budget.”

Gregory noted potential measures; "That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6.0bn a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9bn a year), while still maintaining fiscally prudent appearances."

The potential for tax cuts and evidence of a firmer economy will tend to boost confidence in the economy and will also lessen the potential for a dovish shift by the Bank of England.

Samuel Tombs at Pantheon Macroeconomics considered that Chancellor Hunt might be more cautious to avoid upward pressure on interest rates and added; “the Conservatives cannot risk pushing up mortgage rates again."

Michal Stelmach, senior economist at KPMG UK noted the decline subsidy payments government; “spending on subsidies and other current grants, which included the cost of the Energy Price Guarantee and other support schemes, was down by £5.9 billion on a year ago.”

He did, however, also point to long-term fiscal pressures. According to Stelmach; “the assumption that real spending on unprotected departments would have to fall by over 2% a year is largely unrealistic in the absence of significant productivity improvements. That’s before considering the longer-term pressures from an ageing population, energy transition, and slowing workforce growth.”

Reports overnight indicated that China is preparing a CNY2trn support package for equities.

According to ING; “This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration.”

Risk appetite responded favourably to the news with equity markets posting net gains.

The more positive risk tone helped underpin the Pound in global markets.

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TAGS: Pound Euro Forecasts