• EUR/GBP gains as UK fiscal concerns weigh on the British Pound.
• Stronger-than-expected Eurozone and German ZEW surveys provide support for the Euro.
• UK CPI and PPI data remain the next key catalyst for the cross.

EUR/GBP gains on Tuesday as doubts over the UK’s fiscal outlook weigh on the British Pound (GBP) following Andy Burnham’s appointment as Prime Minister. At the time of writing, the cross trades around 0.8527, extending its gains for a fourth consecutive day.

UK fiscal jitters cap Pound gains as banks see EUR/GBP downside fading

Strategists at OCBC add that Burnham’s confirmation as UK Prime Minister and his appointment of John Healey as “the chancellor of the exchange, while unexpected, was seen as market-friendly.” However, they highlight that Burnham “unsettled the gilt market by suggesting he would use ‘any flexibility’ within the UK’s fiscal rules,” reinforcing investor unease over the fiscal outlook.

Against this backdrop, OCBC argues that “the recent EUR/GBP correction, which has taken the cross to its lowest level in a year, is close to running its course.” The bank says it “continues to expect EUR/GBP to recover towards 0.87 over the coming months, in line with our broader view of a range-bound GBP,” noting that while “higher energy prices raise the risk of additional rate hikes in Europe,” the BoE “still appears less likely than its regional peers to tighten policy, limiting GBP upside.”

Euro draws support from stronger ZEW sentiment data

The Euro (EUR) also finds support from stronger-than-expected ZEW surveys. Eurozone Economic Sentiment jumped to 23.4 in July from 9.5 in June, beating the forecast of 11.2. Germany’s Economic Sentiment Index climbed to 26.3 from 10.5, well above the market expectation of 18.

On the UK side, labour market data offered little support to the Pound. Employment increased by 147K in the three months to May, following a prior 100 K gain. The ILO Unemployment Rate held at 4.9%, slightly below the 5.0% forecast. Attention now shifts to the UK Consumer Price Index (CPI) and Producer Price Index (PPI) data due on Wednesday.