- Pound (GBP) is falling for a fourth day
- Rachel Reeves could lift income tax by 2p
- Euro (EUR) is rising after the ECB rate decision
- The ECB left rates unchanged at 2%
The Pound-Euro (GBP/EUR) exchange rate is falling for a fourth straight day. The pair fell 0.16% in the previous session, settling on Wednesday at €1.1373. It traded between €1.1338 and €1.1397. At 21:00 UTC, GBP/EUR trades -0.02% at €1.1371.
The pound steadied after significant losses this week, trading at its lowest level since May 2023 amid concerns about the UK’s fiscal picture ahead of the chancellor’s budget on November 26.
The Chancellor of the Exchequer, Rachel Reeves, is reportedly considering a 2P increase to income tax. This would mean the chancellor going back on Labour’s manifesto pledge, highlighting the difficult position and limited options that the government now faces.
Recent data showed government sector net borrowing had reached 20.2 billion in September, the second-highest level on record. The UK debt-to-GDP ratio is around 95% up from around 70% pre-COVID.
The EUR pushed higher again after the ECB left interest rates unchanged at 2% for the third straight meeting, in line with expectations. After cutting interest rates 8 times so far this rate-cutting cycle, the ECB considers that policy is in a good place.
Inflation in the region is above target at 2.2%, well above Q3 GDP growth, which came out today at 0.3% quarter on quarter, slightly up from the 0.2% forecast. This level of growth could keep the more dovish policymakers quiet for now. ECB president Christine Lagarde also stressed that unemployment remains close to its historical low in September but highlighted risks to the outlook from the global trade dispute. The strong EUR could limit price inflation.
The market is not expecting the ECB to cut rates again this cycle, with just 10 basis points of rate reduction priced in over the next 9 meetings.
The ECB reiterated its data-dependent stance and that it is not on any set path for rates but will decide on a meeting-by-meeting basis.
There were no major surprises from the meeting.