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Rabobank’s Senior FX Strategist Jane Foley outlines a cautious stance on UK fiscal prospects and their impact on EUR/GBP. The Burnham government’s planned flexibility in fiscal rules and higher infrastructure spending could mean more gilt supply and tax speculation. Foley sees ongoing market nervousness into autumn and prefers buying EUR/GBP on dips toward 0.85, with resistance near 0.8578.
Euro cross supported by UK fiscal uncertainty
“Uncertainty about the budget could keep the UK market nervous into the autumn and we would look to buy EUR/GBP on dips back to 0.85, with the 50 day sma currently providing resistance around the 0.8578 area.”
“The market may be more forgiving if the government is borrowing to invest, but extra gilt supply will still have to be absorbed, and infrastructure projects are likely to take years before they raise capacity.”
“Either way, Burnham’s plans to ease the cost of living for the electorate still must be paid for.”
“Speculation as to which taxes may go higher is already emerging and so too has speculation that this could have a contractionary impact on growth.”
“This implies changing definitions of public debt to allow for more spending on infrastructure.”
