Euro edges up from yearly lows as British Pound softens awaiting UK budget

The Euro (EUR) is drawing some support from a softer British Pound (GBP) on Wednesday, as markets brace for the release of the first budget of Prime Minister Andy Burnham’s cabinet. The EUR/GBP pair has ticked up to session highs above 0.8370 but, so far, seems unable to move far from the 17-month low of 0.8360, after dropping nearly 3% over the last five weeks.

In the UK, all eyes on Wednesday are on Chancellor John Healey’s budget, and more specifically on how he plans to finance the tax exemptions announced by the cabinet to ease British citizens’ cost of living.

UK’s public finances came under scrutiny earlier this year, as the total public sector’s net debt surpassed GBP 3 trillion for the first time in history, at approximately 95% of the country’s Gross Domestic Product (GDP). The previous Chancellor, Rachel Reeves, left a GBP 23.6 billion buffer, but the surge in debt costs is likely to have eaten up a big chunk of it, and traders are sensitive, with bond markets jumpy and memories of Liz Truss’ fiasco in 2022 still fresh.

German consumer sentiment remains subdued

In the Eurozone, the German GfK Consumer Confidence Survey has shown a further deterioration in October, with the index hitting a five-month low of -30.8 from -30.6 in September, yet above the -31.0 market consensus. 

The report released by the Nuremberg Institute of Market Decisions reveals a mixed picture, with economic expectations improving for the sixth consecutive month, while the willingness to buy continues its decline and income expectations deteriorate. 

The highlight in the Eurozone calendar this week is the European Central Bank’s (ECB) monetary policy decision, due on Thursday. The bank is widely expected to leave its Rate on Deposit Facility steady at 2.5%, after having hiked it by a quarter-point in September, although President Christine Lagarde is likely to hint at further monetary policy in the near term.

Analysts at Danske Bank highlight that the latest ECB Q3 Bank Lending Survey shows that banks “tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France.” In Danske Bank’s view, this pattern “suggests that ECB’s tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth.”