- Pound (GBP) is falling after gains last week
- The Chancellor is expected to hike taxes, which will slow growth
- Euro (EUR) is rising, but gains could be limited
- German IFO business sentiment deteriorated in November
The Pound-Euro (GBP/EUR) exchange rate is falling after gains last week. The pair rose 0.37% in the previous week, settling on Friday at €1.1377. It traded between €1.1310 and €1.1391. At 15:00 UTC, GBP/EUR trades -0.16% at €1.1359.
The pound is edging lower amid a cautious market mood, as attention turns to the Chancellor’s budget on the 26th of November.
The chancellor is in a difficult position after data last week showed that public sector net borrowing in October was higher than expected, with borrowing running at £116.8 billion for the fiscal year so far. Heavy spending, weak GDP growth, and an expected productivity downgrade mean the chancellor has no choice but to implement fiscal tightening.
Rachel Reeves is likely to raise taxes to fund an expected £20 to £30 billion hit to public finances, doing so by tinkering around the edges rather than raising income tax. Rising taxes often lead to lower growth and may prompt the BoE to cut interest rates faster than expected. The bond market will assess the credibility of the Chscellor’s plan.
The euro is heading higher, but gains may be limited following weaker-than-expected German business sentiment.
According to the German Ifo business sentiment index, morale unexpectedly fell in November. The Ifo institute said its business climate index fell to 88.1 this month, down from 88.4 in October. This was below expectations of a slight increase at 88.5.
According to the Ifo, sentiment deteriorated as companies have little faith that a recovery in the economy is coming anytime soon.
The data was in line with the German composite PMI index, which showed on Friday that Germany’s private sector growth lost momentum in November.
The German economy contracted in the second quarter of this year and stagnated in the third quarter; however, it is expected to grow slightly in the current and final quarter of 2025.
