OCBC’s Sim Moh Siong and Christopher Wong flag renewed United Kingdom (UK) fiscal concerns under Prime Minister Andy Burnham as a headwind for the British Pound (GBP). With the Bank of England (BoE) seen less likely to tighten than European peers and EUR/GBP near one-year lows, the bank expects the recent GBP strength to fade and looks for EUR/GBP to recover toward 0.87 over coming months.

Fiscal tensions weigh on Pound prospects

"Andy Burnham was confirmed as UK Prime Minister, and his appointment of John Healey as the Chancellor of the Exchequer, while unexpected, was seen as market-friendly. However, Burnham unsettled the gilt market by suggesting he would use "any flexibility" within the UK's fiscal rules."

"We believe accommodating higher defence spending while reversing cuts to unprotected departments will be difficult within the current fiscal framework. This sets up a key tension ahead of the Autumn Budget and next year's Spending Review. That said, with the Budget still several months away, any near-term fiscal measures are likely to be modest and targeted."

"Against this backdrop, we believe the recent EUR/GBP correction, which has taken the cross to its lowest level in a year, is close to running its course."

"We continue to expect EUR/GBP to recover towards 0.87 over the coming months, in line with our broader view of a range-bound GBP. Higher energy prices raise the risk of additional rate hikes in Europe, but the Bank of England still appears less likely than its regional peers to tighten policy, limiting GBP upside."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)