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Pound to Euro Rate Could Slip toward Recent Low in New Year - Rabobank 

 

"While EUR/GBP is trading well below the highs reached in the direct aftermath of the disastrous September 23 UK mini-budget, we continue to see risk of a slow grind higher in the currency pair in the months ahead," - Rabobank. 

 

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The Pound to Euro exchange rate has recovored from September's losses but could partially reverse recent gains in the months ahead as poor UK economic fundamentals take centre stage again, according to Rabobank forecasts. 

Pound Sterling remained near an October high against the Euro on Friday after the single currency was sold widely in the wake of Thursday's European Central Bank policy decision but the latest forecast review from Rabobank suggests that this recovery may already be on borrowed time.  

"While EUR/GBP is trading well below the highs reached in the direct aftermath of the disastrous September 23 UK mini-budget, e continue to see risk of a slow grind higher," says Jane Foley, head of FX strategy at Rabobank.

"The government is set to announce tax hikes next month in the face of recession and the cost of living crisis. Not only will this be difficult for the electorate to stomach but, in the absence of reforms aimed at encouraging investment and productivity growth, GBP’s recovery may already have run out of traction," she wrote in a Thursday review of forecasts for Sterling. 

Foley and Rabobank's forecasts suggest the Pound to Euro rate will fall back to 1.1111 by the early months of the new year.


Above: Pound to Euro rate shown at 2-hour intervals alongside GBP/USD. Click image for closer inspection. 

 


This is mostly because a debilitating fiscal policy at HM Treasury is set to weigh on the economic outlook through tax increases and spending cuts aimed at repairing damage done to the public finances during the pandemic response.

But there is also potential political uncertainty if divisions within the governing party hamper the government's ability to pursue its policy agenda.

"Not only are the issues in [Sunak's] in-tray hugely challenging but he will be trying to lead a party that is deeply divided. There are no guarantees of his success. If Sunak’s cannot muster the support of most Tory MPs, there is a risk that a general election may have to be called," Foley says.

The Pound to Euro rate fell as low as 1.0850 in late September when financial markets appeared to protest the policy progamme of previous Prime Minister Liz Truss, leaving trading close to post-referendum lows, before recovering following October's change of government. 

This and a Thursday's Euro sell-off saw the Pound trading near 1.16 ahead of the weekend but it remains to be seen if Sterling can sustain its recovery. 


Above: Pound to Euro rate shown at daily intervals alongside GBP/USD. Click image for closer inspection. 

 


"Relief that the current PM and Chancellor understand the necessity of working with the BoE to bring down inflation and the risk to the gilt market of unfunded tax cuts, has seen both gilt yields and GBP settle," Foley says.

The Pound's performance this week comes just days ahead of November's Bank of England (BoE) monetary policy decision and amid heightened uncertainty over the outlook for Bank Rate after the new government's budget statement was delayed until November 17 earlier this week. 

BoE officials had suggested repeatedly that Liz Truss' earlier spending plans would merit an aggressive interest rate response but since then HM Treasury has scrapped most of the tax giveaways contained in the late September fiscal statement and indicated that outright spending cuts are likely ahead.

There is also uncertainty about the length of time over which households and businesses will be shielded from energy costs that have risen fourfold in the last year, which is another factor that will complicate next Thursday's interest rate decision from the Bank of England. 

"BoE rate hikes have been falling to turn around the prospects of the pound. The currency has been undermined by weak investment growth combined with low productivity levels, high inflation, slow growth, ongoing issues surrounding the Northern Ireland protocol and relations with the EU," Foley said. 

"The UK’s current account deficit has further exposed the GBP to the impact of the weak line up of fundamentals," she added.