OCBC strategists Sim Moh Siong and Christopher Wong state that the recent strength of the British Pound (GBP) against the Euro appears stretched, as markets have priced in expectations of fiscal discipline from the new UK government led by Andy Burnham [1]. The rally in GBP was attributed to reports suggesting Burnham is likely to appoint Shabana Mahmood as Chancellor, who is perceived as more fiscally conservative compared to other candidates [1].
The strategists highlight that the OECD, in its latest outlook for the United Kingdom, has warned about significant fiscal constraints, citing high public debt, elevated interest costs, and increasing healthcare and social care expenditures as major challenges to fiscal flexibility [1]. OCBC notes that balancing increased defence spending with the reversal of cuts to unprotected departments could be difficult within the current fiscal framework [1].
Following these developments, the EUR/GBP currency pair has fallen to its lowest level in a year. However, OCBC expects this correction to be nearing exhaustion and anticipates a recovery in EUR/GBP towards 0.87 in the coming months, aligning with their view that the Pound will remain broadly range-bound [1]. The strategists also mention that while rising energy prices may increase the risk of further rate hikes by the European Central Bank (ECB), the Bank of England is seen as the least likely among major central banks to raise rates further [1].
CONCLUSION
OCBC strategists believe the British Pound's rally against the Euro is likely to lose momentum due to fiscal challenges highlighted by the OECD and the complexities facing the new UK government. They expect EUR/GBP to recover towards 0.87, reflecting a more range-bound outlook for the Pound in the coming months.