Euro posts modest recovery from yearly lows as British Pound eases ahead of UK budget

• 0.8370 marks a modest recovery for EUR/GBP. The pair remains close to its 17-month low of 0.8360.
• Ahead of the UK budget, the Pound is weakening against its major counterparts.
• October brought weaker German consumer sentiment as falling consumer incomes offset an improvement in economic expectations.

EUR/GBP has reached session highs above 0.8370. Wednesday’s modest advance reflects support for the Euro (EUR) from a weaker British Pound (GBP), with markets awaiting the first budget from Prime Minister Andy Burnham’s cabinet. Having lost nearly 3% over the past five weeks, the pair still appears unable to pull far away from its 17-month low of 0.8360.

Chancellor John Healey’s budget dominates the UK agenda on Wednesday. The central question is how he intends to fund the tax exemptions announced by the cabinet to relieve the cost-of-living burden on British citizens.

Public sector net debt exceeded GBP 3 trillion for the first time earlier this year, bringing the UK’s public finances under scrutiny. That total represented 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 depleted by rising debt-servicing costs. Traders remain sensitive as bond markets turn nervous, with Liz Truss’ 2022 fiasco still fresh in their minds.

-30.8: German consumer sentiment stays weak

Germany’s GfK Consumer Confidence Survey fell to a five-month low of -30.8 in October, compared with -30.6 in September. The latest deterioration in sentiment in the Eurozone’s German economy nevertheless left the index above the market consensus of -31.0. 

Published by the Nuremberg Institute of Market Decisions, the report presents divergent trends. Economic expectations improved for the sixth consecutive month, but willingness to buy continued to weaken and income expectations declined. 

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 hold its Rate on Deposit Facility at 2.5%. President Christine Lagarde, however, is likely to signal further monetary policy action in the near term.

Citing the latest ECB 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."