OCBC analysts Sim Moh Siong and Christopher Wong have highlighted renewed fiscal concerns in the United Kingdom under Prime Minister Andy Burnham as a significant headwind for the British Pound (GBP) against the Euro. The appointment of John Healey as Chancellor of the Exchequer, while unexpected, was considered market-friendly. However, Burnham's comments about using 'any flexibility' within the UK's fiscal rules unsettled the gilt market, raising questions about the government's ability to accommodate higher defence spending and reverse cuts to unprotected departments within the current fiscal framework. This tension is expected to persist ahead of the Autumn Budget and next year's Spending Review, though any near-term fiscal measures are likely to be modest and targeted, given the Budget is still several months away [1].
The analysts note that the recent correction in EUR/GBP, which has brought the cross to its lowest level in a year, is likely nearing its end. OCBC expects EUR/GBP to recover towards 0.87 over the coming months, reflecting their broader view of a range-bound GBP. They also point out that higher energy prices could increase the risk of additional rate hikes in Europe, but the Bank of England appears less likely than its regional peers to tighten policy further, which limits the upside for GBP [1].
CONCLUSION
OCBC anticipates that the British Pound's recent strength against the Euro will fade due to UK fiscal uncertainties and a less hawkish Bank of England compared to European peers. The bank expects EUR/GBP to recover towards 0.87 in the coming months, with GBP likely to remain range-bound.