Rabobank's Senior FX Strategist Jane Foley highlights that uncertainty surrounding the UK government's budget and fiscal policy is leaving the British Pound vulnerable against the Euro. The Burnham government’s intention to introduce more flexibility in fiscal rules and increase infrastructure spending could result in higher gilt supply and ongoing speculation about potential tax increases [1]. Foley notes that while markets may be more tolerant if government borrowing is directed toward investment, the additional gilt supply will still need to be absorbed, and infrastructure projects are expected to take years before contributing to economic capacity [1].
Foley observes that speculation regarding which taxes may rise is already present, and there are concerns that such measures could have a contractionary effect on growth [1]. She also points out that the government’s plans to ease the cost of living must ultimately be financed, possibly through changing definitions of public debt to accommodate more infrastructure spending [1].
From a market perspective, Foley expects continued nervousness in the UK market into the autumn and recommends buying EUR/GBP on dips toward 0.85, with resistance seen near the 0.8578 level, as indicated by the 50-day simple moving average [1].
CONCLUSION
Ongoing fiscal uncertainty and speculation about tax increases are weighing on the British Pound, with Rabobank recommending a cautious approach to Sterling. Market participants are expected to remain nervous until greater clarity emerges on the UK government's fiscal plans.