Fiscal Ambiguity Keeps GBP Weak vs EUR as Autumn Nerves Persist

Rabobank's Senior FX Strategist Jane Foley is cautioning investors to be wary of the UK's fiscal outlook and its implications for EUR/GBP. She notes that uncertainty around the budget could keep the market nervous into autumn, with a preferred approach being to buy EUR/GBP on dips back to 0.85.

Foley highlights two key factors shaping the currency pair's direction: the Burnham government's intention to allow greater flexibility in fiscal rules and increased infrastructure spending. This may translate into higher government borrowing and more gilt issuance, which could lead to additional supply in the gilt market.

The market may be forgiving if the government borrows to invest, but extra gilt supply still needs to be absorbed. Infrastructure projects are likely to take years before they raise capacity, and either way, Burnham's plans to ease the cost of living must be paid for through taxes or other means.