- Pound (GBP) is rising for a second straight day
- Goldman Sach expect large tax hikes from the Budget
- Euro (EUR) falls further as a new PM is appointed
- ECB is expected to leave rates unchanged
The Pound-Euro (GBP/EUR) exchange rate is rising for a second day. The pair rose 0.33% in the previous session, settling on Tuesday at €1.1553. It traded between €1.1512 and €1.1558. At 10:00 UTC, GBP/EUR trades +0.09% at €1.1563.
The pound is moving higher for a second straight day as it quietly outperforms the broader market despite concerns surrounding the Chancellor’s Budget in November.
According to analysts at Goldman Sachs investment bank, Chancellor Rachel Reeves will likely implement significant tax increases in the upcoming budget. The bank also warned that the UK had a limited historical success in repairing public finances via tax hikes. The chancellor is facing mounting pressure to address a sizeable budget deficit after welfare reforms were abandoned earlier in the year.
Still, recent gilt auctions appeared to be going well, suggesting that the UK has no problem servicing its debt if the price is right.
The pound is also being supported by expectations that the Bank of England may struggle to cut interest rates again in the near term, given that inflation remains sticky at 3.8%, almost double the BoE’s target 2% level.
The euro remains under pressure against the pound and the US dollar as French politics remain in focus. After French Prime Minister Bayrou’s government collapsed following a vote of no-confidence, Bayrou resigned, and President Macron appointed a third PM in a year.
Sebastian Lecornu is tasked with uniting France’s divided parties to reach a budget consensus.
Attention is also turning to tomorrow’s ECB rate decision, where officials are expected to leave the interest rate unchanged for a second straight meeting as trade uncertainty lingers and inflation in the region remains on target for a third straight month.
The market will be looking for any hints from the ECB that it is done with cutting rates. A hawkish tone from ECB president Christine Lagarde in July dented expectations for further moves. A trade deal between the US and the EU followed, and so far, the economy is holding up. So there is little reason to move imminently.