- GBP/EUR mild upside technical bias
- 1.19 possible
- Broader background sentiment supportive of GBP
- UK spending review key domestic risk
Rachel Reeves will deliver the spending review on Wednesday. Picture by Kirsty O'Connor / Treasury.
Pound Sterling can edge higher against the Euro this week.
The Pound to Euro exchange rate (GBP/EUR) continues to respect our Week Ahead Forecast model, leaving us expecting an eventual move higher in the coming days.
Short-term price action has been relatively uninspiring of late, but as the below chart shows, this price action has been anticipated.
Above: GBP/EUR at daily intervals with the Week Ahead Forecast annotation.
The arrow in the above chart was drawn last Monday, and it served well in predicting that the Pound would steer a sideways path against the Euro before edging higher in sympathy with the uptrend that has been in place since April.
We see no reason to change this expectation, and leave the arrow intact at the start of this week.
The implication of the forecast is that Pound-Euro starts to move higher, and that 1.19 is achieved later this week.
The main risk, we think, is that we get a continuation of the sideways chop, reflecting a market that is waiting for a new major data point or development to give either the Euro or Pound the upper hand.
The Upside Case
In favour of GBP upside is the buoyant market mood that prevails, helped by last week's confirmation that U.S. data has not succumbed to President Donald Trump's tariffs. Friday's Non-farm payroll figures showed U.S. employment remained robust, leaving U.S. and global equity markets on the front foot.
Given the Pound to Euro exchange rate is positively correlated to broader global sentiment, it will find the meltup in stock markets to be supportive.
Also, the UK's economy is ticking along, with incoming surveys suggesting we should see a decent outturn in growth in H2.
Tuesday's jobs data bears watching, as it should confirm wages continue to rise at a pace consistent with elevated inflationary conditions, leaving the Bank of England with limited scope to cut interest rates.
The Big Risk
The joker in the pack for Pound Sterling would be a bad reaction to Wednesday's spending review from Rachel Reeves, where she will set out government departmental spending for the next three years.
This publication has regularly warned its readers that the UK's debt pile poses a potential longer-term risk to the pound in the event that foreign investors begin to see UK debt dynamics as unsustainable. This is a niggling concern given the U.S. is also growing itse debt pile, meaning global investors are being asked to hoover up ever greater amounts of debt.
Typically, the Pound tracks UK bond yields higher (the yield is the 'interest rate' paid by UK government bonds, which it issues in order to borrow money). But when UK bond yields rise (in anticipation of more spending, borrowing and higher inflation) and the Pound falls, the market is expressing doubts about the sustainability of the UK's debt.
Wednesday's spending review is not a budget event, so there will be no tax announcements, meaning it is up to Chancellor Reeves to show spending is not running out of control. Failure to do so will risk market confidence in the UK's debt sustainability, send yields higher and the Pound lower.
Odds of this are low, we think, but if there are sustainability questions, the fall in the Pound could be severe.