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Could Disappointing UK Budget Extend Euro Pound Exchange Rate Gains?

The Euro has struggled to recover any particular ground in the wake of the breakdown of German coalition talks, with markets still discouraged by the prospect of continued political uncertainty.

With the odds of a fresh election rather higher than investors would like the appeal of the single currency remains distinctly limited.

There are naturally concerns that a lack of stable German government could have a negative influence on domestic confidence, potentially dragging on economic growth over the coming months.

However, EUR exchange rates could find some increased degree of support if this afternoon’s Eurozone consumer confidence index shows an improvement.

Forecasts point towards a slight uptick from -1 to -0.9 in November, suggesting that the mood within the currency union is turning at least a little more optimistic.

Focus will also fall on Thursday’s raft of Eurozone manufacturing and service PMIs, which are likely to underline the generally bullish outlook of the domestic economy.

As long as economic growth continues to show signs of robustness the downside potential of the Euro Pound exchange rate will remain limited.

Any negative surprises, though, could see confidence in the single currency deteriorate further ahead of the weekend.

Budget Jitters Dampen Pound Sterling Appeal

Demand for Sterling remained rather muted as anticipation for the latest UK Budget continued to mount, even though expectations for the announcement are not overly high.

Chancellor Philip Hammond has little room for manoeuver at this stage, given the less impressive state of the UK finances and a potential growth forecast downgrade from the Office for Budget Responsibility (OBR).

The stakes for the Chancellor are high, however, as hard-line Brexiteers have expressed repeated criticism of the more cautiously-minded Hammond.

As analysts at BBH commented:

‘The UK government is fragile. Infighting is notorious. It appears the hard-line Brexit camp does not trust Hammond. A cabinet reshuffle is widely rumoured, and Hammond seems vulnerable. Prime Minister May, who also initially was in the Remain Camp, is said to regard Hammond suspiciously.

‘Hammond is understood to be fiscally conservative, but he is hemmed in by the slowing economy, Brexit uncertainties, and a weak government. His proposal in the spring to have small businesses pay more for National Insurance fell flat, and it was quickly retracted. Another faux pas and his fate in the government could be sealed.’

If the Budget fails to cause any particular political fireworks, though, this could give the Pound some cause for confidence.

Nevertheless, a significant downwards revision of the OBR’s economic forecasts may see the EUR GBP exchange rate extending its gains further this afternoon.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was making gains in the region of 0.8875. Meanwhile, the Pound Euro exchange rate was trending lower around 1.1267.