- Pound (GBP) is falling for a second day
- UK government borrowing rises to £18 billion in August
- Euro (EUR) rises despite cooler German PPI
- The ECB may not cut rates again
The Pound-Euro (GBP/EUR) exchange rate is falling for a second straight day. The pair fell 0.22% in the previous session, settling on Thursday at €1.1498. It traded between €1.1494 and €1.1545. At 17:00 UTC, GBP/EUR trades -0.24% at €1.1480.
The pound is falling on Friday as worries over the fiscal backdrop outweigh stronger-than-forecast retail sales.
UK government borrowing has soared past official forecasts that underpin the government’s tax and spending plans, underscoring the challenges facing finance minister Rachel Reeves in her November budget.
Public sector net borrowing between April and August totals £83.8 billion, £11.4 billion more than the figures projected by the Office for Budget Responsibility. For August alone, the figure was £18 billion, £3.5 billion higher than last year and the highest August level since the pandemic.
It is widely expected that Chancellor Reeves will increase taxes in her budget on November 26th in order to meet her fiscal rules. However, following this latest borrowing data, her position appears to be worse than initially thought. As a result, higher taxes may be necessary or lower spending, which slows growth.
Concerns over the outlook overshadowed stronger-than-expected UK retail sales for August. Sales increased by 0.5% month on month, helped by warm weather, and despite sticky inflation keeping household budgets squeezed.
The EUR is rising despite a larger-than-expected fall in German wholesale inflation, as measured by the producer price index, which declined by 0.5% month over month in August. This exceeded both the market’s expectations and the 0.1% decline in July.
On an annual basis, PPI fell 2.2% after a 1.5% decline in July. This was deeper than the 1.8% decline that economists had forecast.
Despite the softer-than-expected inflation reading, the euro trades higher amid increasing expectations that the ECB may soon end or may have ended its rate-cutting cycle.
Vice President Luis de Guindos said the central bank should follow a very prudent approach to further rate cuts.