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EUR/GBP rises to late-July highs amid UK fiscal strains and political uncertainty

  • Euro gains ground against the Pound amid UK fiscal and political uncertainty.
  • German GfK Consumer Confidence beats forecasts, with income expectations improving.
  • UK government borrowing reaches a five-year high for August, raising deficit and debt concerns.

The Euro (EUR) strengthens against the British Pound (GBP) on Thursday, with EUR/GBP trading around 0.8740 after briefly touching its highest level since July 28 earlier in the day. Sterling remains under pressure as investors grow wary of the UK’s fiscal outlook, while the Euro finds modest support from improving German sentiment data, keeping the cross biased to the upside.

The German GfK Consumer Confidence Survey for October improved to -22.3, beating expectations of -23.3 and rising from -23.5 in September. The gain was driven by stronger income expectations, though household willingness to spend and economic outlook gauges weakened further.

Remarks from the European Central Bank (ECB) also helped steady the Euro. Executive Board member Piero Cipollone said on Wednesday that “we are doing pretty well” and that growth is expected to remain “in a good place in the coming years” thanks to solid fundamentals and a resilient labour market. He added that uncertainty persists, but described the risks to inflation as “very balanced,” with expectations “well anchored” and inflation set to remain close to the target over the next two years.

On the UK side, fiscal credibility concerns continue to dominate. Government borrowing surged to £18 billion in August, the highest for that month in five years, while weak demand at recent gilt auctions has underlined investor unease.

Markets remain cautious about how Chancellor Rachel Reeves will manage the rising deficit ahead of the November budget. Political uncertainty, including Labour leadership tensions and new spending proposals, is adding to the pressure and weighing on the Pound.

Meanwhile, the Bank of England (BoE) struck a cautious tone in mid-week remarks. MPC member Megan Greene argued that “a cautious approach to rate cuts is justified,” noting that supply shocks should not simply be ignored. Governor Andrew Bailey reiterated that while further easing remains possible, the timing and scale will depend strictly on the inflation outlook.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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