EURGBP in Focus Amid Upcoming UK, EZ CPI

Several events last week caused the pound to decline, leaving it weaker against the euro, as investors worry that the British economy will fall behind its European counterparts.

The Key Developments

• Recent UK data indicate that the economy is underperforming, with GDP growth at 0.1% and the unemployment rate rising to 5.0%.
• The pound weakened on Friday amid rumours that the Chancellor was scrapping plans to raise income taxes.
• The BOE is expected to resume cutting, while the ECB is projected to keep rates unchanged, a dynamic that would continue to weaken the pound against the euro.

A Week of Bad News for Sterling

The pound was lower against most major currencies last week but notably lost ground against the euro as well, leaving the EURGBP at its highest level since mid-2023. The pair has been on an upward trend for six months straight and has accumulated 1% gains so far in November and 6.4% since the start of the year. The latest blow to sterling came on Friday, as rumours circulated that Chancellor Rachel Reeves hadabandoned plans to raise income tax rates in the November budget. It raised questions about how the government would plug an estimated £30 billion hole in public finances, with numerous theories about how the Chancellor would increase revenue. One of the options that has received considerable attention is freezing the current income tax bands, which would result in more people fitting into higher tax rates.

The consternation around taxes is based on the consensus that higher taxes would further slow the economy. Businesses argue that the tax increase last year has already impacted growth, andthe UK economy is barely growing. The first estimate of Q3 GDP released the previous week disappointed, showing growth of just 0.1% for the quarter, which was half of what analysts had expected. This came just two days afterthe unemployment rate unexpectedly rose to 5.0%, confirming the BOE's expectations of growing "slack" in the economy. After the BOE set up expectations of a rate cut in December, the subsequent data have all but confirmed it. Now, markets are moving to price in further easing next year amid expectations that the inflation rate will fall as the economy enters a recession.

Eurozone Slightly Better, But Enough for Investors

Despite the data indicating prolonged rate cuts by the BOE, the situation appears to be more stable across the Channel. The economy, although sluggish, is consistently in the green. And the inflation rate is on target for the ECB, with futures markets expectingno action from the central bank until late into next year. This differential in outlook between the central banks could explain the dynamics in the currency pair. Traders are also looking to invest in European stock markets that offer the prospect of better returns. With the UK economy at best stagnating, pound-denominated assets show less promise of growth compared to their EU counterparts.Investors pulled a record $10 billion from UK equity markets over the last six months, selling pounds in the process.

Traders will update their expectations for the ECB and BOE with the release of the latest CPI figures on Wednesday. UK October inflation is projected to slow to 3.7% from 3.8%, with the core inflation rate declining by a similar amount to 3.4% from 3.5% in the previous month. The final Eurozone October CPI is expected to be confirmed at 2.1%, down from 2.2% in September, with the core rate remaining unchanged at 2.4%.

EURGBP Triangle Completion Supports Upside

EURGBP broke outside a symmetrical triangle at the end of October, opening the door to 0.8910 when projected by its measured move from the breaking point near 0.8740. However, the recent short-term drop towards 0.8800 following its prevailing structure to 0.8860 shows a non-impulsive pattern, which increases the odds of further drops. If support at 0.8762 gives way to bears, the pair may decline to retest the upper triangle trendline. On the other hand, if any of the aforementioned levels hold firm, EURGBP could resume its short-term trend, potentially even breaking higher towards 0.9900.

Source: SpreadEx | EURGBP Daily