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Pound Sterling looks set to soften against the Euro as a brief recovery fails to morph into an uptrend.
The pound to euro exchange rate (GBP/EUR) was unable to capitalise on August's recovery and starts September on the weak side, and we anticipate more losses in the coming days.
Those wanting a stronger pound with which to purchase euros will be disappointed with this prediction, particularly given the rising political uncertainty in France ahead of next week's no-confidence vote on the Bayrou government.
Sterling's inability to push August's recovery into September and carve out a new short-term uptrend reflects an ongoing caution towards the UK currency likely linked to fears for the domestic economic outlook ahead of the November budget.
Despite recovering for much of August, GBP/EUR still recorded a small monthly loss of 0.08%, closing the account at 1.1552, having been as high as 1.1630 mid-month.
Resistance at 1.16 ultimately proved to be the technical undoing for those wanting a stronger exchange rate, as the level proved a solid force of resistance where selling interest met the Pound's advance.
Above: GBP/EUR at daily intervals.
Failure at 1.16 leaves the Pound looking lower for an easier route of travel, and the dip through the nine-day exponential moving average (EMA) at 1.1558 on Friday leaves our Week Ahead Forecast model advocating for lower levels in the coming five days.
With this in mind, the first target of 1.15 looks eminently achievable, ahead of a return to 1.1413 in the one-month timeframe.
It looks as though August's recovery is better described as a consolidation of the broader and more enduring 2025 decline, meaning the overarching downtrend is likely to resume at some point.
The falls at the turn of the month could be a precursor to that move restarting.
Although France's politicians will likely depose the government of Francois Bayrou next week, it is now clear that the entire episode is unlikely to bother GBP/EUR, largely because we have a template as to how the matter will play out courtesy of the failure of the Barnier government in December.
The softness in Pound Sterling coincides with the Autumn weather that has closed in on the UK over recent days, and with Autumn comes the budget.
Apprehension ahead of the budget won't be helpful for the Pound, and a failure of GBP/EUR to push the August recovery into a September rally likely speaks of a downbeat investor sentiment towards the currency.
The Budget is due to be unveiled in November, and the Treasury is already testing a whole range of new taxes that Chancellor Rachel Reeves hopes will raise enough revenue to fill a growing budget deficit.
Taxes being floated include:
- National Insurance on Rental Income (Landlords)
- Overhaul of Property Taxes
- Wealth, Inheritance & Pension-Related Tax Reforms
- Fiscal Drag via Freezing Tax Thresholds & Pension Tax Reliefs
- VAT Registration Threshold Adjustments
- Wealth/Asset-Focused Taxes
Markets have a template to utilise: we saw similar fear-and-gloom warnings from the government this time last year, where it promised more near-term pain to 'fix the foundations'.
However, that messaging seemed to trigger defensive behaviour by households and businesses which stalled the economy and put financial markets on edge.
History doesn't repeat but it can rhyme: more taxes are coming, caution rises, the economy suffers and the Pound stutters.