– Written by
James Fuller
STORY LINK British Pound to Euro Forecast: EU Reset Hopes Push GBP/EUR to 16-Month High
The Pound to Euro exchange rate (GBP/EUR) has climbed towards 16-month highs around 1.1820 as renewed hopes of closer UK-EU relations provide Sterling with fresh support.
French fiscal concerns continue to weigh more heavily on the Euro than Britain’s own debt problems, although warnings that Chancellor John Healey faces a £35bn Budget challenge highlight the risks to the Pound’s recent rally.
GBP/EUR Forecasts: Pound Gains on EU Hopes, French and UK Fiscal Fears Battle for Economic Dominance
The Pound to Euro (GBP/EUR) exchange rate secured a net gain to 1.1820 on Monday and close to 16-month highs. At this stage, French debt fears are still higher than for the UK, underpinning the Pound with hopes for closer UK ties with the EU also a positive element.
According to MUFG; “At the current juncture, there is no obvious positive catalyst that could trigger a reversal of bearish sentiment towards the euro.”
GBP/EUR is on course to post a closing daily gain for 11 of the last 12 trading days amid improved sentiment. The latest COT data, released by the CFTC, recorded a fresh increase in short Pound positions, maintaining the potential for short covering which could trigger further short-term support.
The Pound drew fresh support from fresh speculation that there will be a push towards closer ties with Europe.
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Prime Minister Burnham is expected to tell the Commons later it would be a “dereliction of duty” to reject a closer relationship with the EU – if one can be negotiated with Brussels. Burnham is expected to add that it is time to “face up to the reality that Brexit has done more harm than good” and “the status quo is not good enough for Britain.”
Geo-political developments will continue to be monitored closely, especially with a fresh increase in energy prices on Monday.
Budget developments in the UK and France will continue to be watched closely with higher bond yields and inflation pressures increasing underlying stresses.
According to the Institute for Fiscal Studies (IFS), UK Chancellor Healey will need to find £35bn in the budget to avoid cuts to public spending while meeting defence promises.
According to IFS director Helen Miller; “A ‘steady-as-she-goes’ Budget is not an option available to the chancellor.”
She added; “Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course. Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction.”
UK bond yields edged lower in early Europe, but underlying confidence remains fragile with the 10-year yield around 5.42%.
Underlying French pressures also remain intense, particularly with public protests. ING commented; “French debt spreads remain near their widest, with Marine Le Pen’s counter-budget proposal last week raising more questions than it answered.”
According to MUFG; “The true test of her ability and willingness to implement more aggressive fiscal tightening will only come after the presidential elections, and until then market participants are understandably likely to remain sceptical.”
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TAGS: Pound Euro Forecasts
