Ella 
In a recent turn of events, the Pound to Euro (GBP/EUR) exchange rate has surged to a modest six-week high, reaching 1.1690, driven by a combination of robust UK government borrowing data and favorable risk conditions on the global stage.
Investors responded to the news by factoring in expectations of larger tax cuts anticipated in the upcoming March budget, resulting in the GBP/EUR exchange rate achieving its 6-week pinnacle.
Despite the positive momentum, GBP/EUR faced resistance at the 1.1690 level, struggling to secure a definitive breakthrough over the course of the last four trading sessions. Caution is anticipated in the lead-up to Thursday’s European Central Bank (ECB) policy meeting, which could potentially bolster the Euro. Before the ECB meeting, Wednesday’s release of business confidence data will be closely monitored for its impact on market dynamics.
Market analysts emphasize the significance of the UK PMI business confidence data, indicating that a stronger reading could trigger additional gains for the Pound. Goldman Sachs, in particular, anticipates headwinds for the Euro in the coming weeks, with the PMI and inflation reports potentially overshadowing the ECB’s expected steadfast message.
The latest UK data reveals a notable decrease in the December government borrowing requirement, dropping to £7.8 billion from £16.2 billion in the previous year, marking the lowest December deficit since 2019. This monthly deficit also surpassed consensus forecasts, standing notably below the expected £11.4 billion.
While the fiscal deficit for the first nine months of fiscal 2023/24 widened to £119.1 billion from £108 billion the previous year, it was nearly £5 billion less than the Office for Budget Responsibility’s (OBR) forecast for the period.
Crucially, there was a substantial decline in debt interest payments to £4.0 billion from £18.1 billion in the previous year, contributing to lower-than-expected deficits. Analysts suggest that this development could provide Chancellor Hunt with increased fiscal headroom ahead of the March 6th budget.
Economists at Capital Economics, including Ruth Gregory, highlight the potential for the Chancellor to exceed fiscal targets, potentially allowing for measures such as a freeze in fuel duty and a 1p cut to income tax, while still maintaining fiscal prudence.
The prospect of tax cuts, coupled with evidence of a robust economy, is expected to instill confidence and mitigate the likelihood of a dovish shift by the Bank of England. However, some analysts, including Samuel Tombs at Pantheon Macroeconomics, caution that Chancellor Hunt may exercise prudence to avoid upward pressure on interest rates.
