British Pound to Euro Forecast: Can GBP Extend Its Rally After Political Transition?

– Written by


Frank Davies

STORY LINK British Pound to Euro Forecast: Can GBP Extend Its Rally After Political Transition?

The Pound to Euro exchange rate (GBP/EUR) has consolidated above the 1.1600 level after reaching its strongest level in almost ten months, with Sterling continuing to benefit from improving market confidence in the UK’s political transition.

Investors remain optimistic that an Andy Burnham administration will avoid any immediate fiscal disruption, although attention is increasingly turning towards the composition of the new Cabinet and, in particular, the appointment of the next Chancellor.

GBP/EUR Forecasts: Consolidation Near 1.16

The Pound to Euro (GBP/EUR) exchange rate has consolidated just above the 1.1600 level after failing to make a fresh attack on 10-month highs seen around 1.1620 on Wednesday.

Overall Pound sentiment remains firm with gains in equity markets also offering support.

There is still uncertainty whether Burnham will face a contest to be elected Labour Party leader, but there are very strong expectations that he will win and succeed Starmer as Prime Minister.

Commerzbank is wary over the Pound outlook; “Burnham will endeavour not to unsettle the markets too much. The risks, however, are likely to be asymmetric.”

According to the bank; “If he succeeds in maintaining the status quo, the pound will react positively. But if he calls the fiscal rules into question, the pound is likely to depreciate significantly.”

As far as data is concerned, the CBI retail survey deteriorated further to -54 for June from -46 previously and below consensus forecasts of -41.

Retailers expect a further decline in sales next month. CBI Lead Economist Martin Sartorius commented; “Retailers reported a gloomy start to the summer, with sales disappointing relative to seasonal norms to the greatest extent in over two years amid depressed consumer sentiment and rising cost pressures.”

The main short-term focus will continue to be the composition of the government with a particular focus on who will be Chancellor and whether there will be a shift in fiscal rules.

Westminster talk continues to suggest that Reeves will be replaced, increasing underlying uncertainty over fiscal policy.

There have also been suggestions that Burnham could look to amend fiscal rules to boost potential spending, especially on infrastructure investment with no easy options.

RBC BlueBay chief investment officer Mark Dowding commented; “He is boxed in by the fact that government finances are in a weak position, and if he chooses to ignore this reality, then he could find himself under pressure very quickly.”

He added; “Markets are more prone to be sceptical at the outset if he tries to be too adventurous … from that perspective Burnham could be walking a tightrope partly of his own making. It won’t take too many headlines for the bond markets to suddenly be on its back.”

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TAGS: Pound Euro Forecasts