British Pound eases ahead of UK budget as Euro inches higher from yearly lows

• EUR/GBP remains close to its 17-month low of 0.8360 despite a modest rise to 0.8370.
• Sterling weakens against its major peers as the forthcoming UK budget takes centre stage.
• Despite better economic expectations, German consumer sentiment weakened in October as consumers' income declined.

Weakness in the British Pound (GBP) is lending some support to the Euro (EUR) on Wednesday ahead of the first budget from Prime Minister Andy Burnham’s cabinet. Having lost nearly 3% over the past five weeks, EUR/GBP has edged above 0.8370 to reach session highs. Even so, the pair appears unable, for now, to gain much distance from its 17-month low of 0.8360.

Wednesday’s focus in the UK is Chancellor John Healey’s budget, particularly his plans to fund the tax exemptions the cabinet has announced to ease the cost of living for British citizens.

Scrutiny of the UK’s public finances intensified earlier this year when total public sector net debt exceeded GBP 3 trillion for the first time, equivalent to approximately 95% of the country’s Gross Domestic Product (GDP). A GBP 23.6 billion buffer left by the previous Chancellor, Rachel Reeves, is likely to have been substantially eroded by rising debt costs. Traders remain sensitive amid nervous bond markets, with memories of Liz Truss’ 2022 fiasco still fresh.

Why does German consumer sentiment remain weak?

For the Eurozone, Germany’s GfK Consumer Confidence Survey pointed to another decline in October. The index slipped from -30.6 in September to a five-month low of -30.8, though it remained above the market consensus of -31.0. 

A mixed picture emerges from the Nuremberg Institute of Market Decisions report: economic expectations improved for the sixth consecutive month, but willingness to buy continued to weaken and income expectations worsened. 

Thursday’s European Central Bank (ECB) monetary policy decision is the main event on this week’s Eurozone calendar. Following a quarter-point increase in September, the bank is widely expected to retain its Rate on Deposit Facility at 2.5%. President Christine Lagarde, however, is likely to signal further monetary policy action in the near term.

Drawing attention to the ECB’s latest Q3 Bank Lending Survey, Danske Bank analysts note that banks "tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France." Danske Bank interprets this pattern as one that "suggests that ECB's tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth."