OCBC strategists Sim Moh Siong and Christopher Wong highlight that hopes of a fiscally conservative Chancellor under incoming United Kingdom (UK) Prime Minister Burnham have supported the British Pound (GBP) and gilts. Nonetheless, high public debt, spending pressures and limited fiscal room constrain GBP upside. They expect EUR/GBP’s recent correction to fade and look for the cross to recover towards 0.87, consistent with a range-bound view on the Pound.

Politics, constraints and EUR/GBP

"All eyes are on incoming UK Prime Minister Burnham's choice of Chancellor and the government's economic agenda. GBP and gilts rallied after reports that Burnham is likely to appoint Shabana Mahmood as Chancellor, rather than a candidate viewed as less fiscally conservative."

"We continue to expect a fiscally responsible shift to the left. However, competing demands, including higher defence spending and reversing cuts to unprotected departments, could prove difficult to accommodate within the current fiscal framework. This creates a key tension heading into the Autumn Budget and next year's Spending Review."

"The OECD echoed these concerns in its latest UK outlook, warning that fiscal discipline remains essential. It highlighted high public debt, elevated interest costs, and rising healthcare and social care spending pressures as key constraints on fiscal flexibility. "

"Against this backdrop, we believe the recent EUR/GBP correction is likely to run out of steam. We continue to expect the cross to recover towards 0.87 in the coming months, consistent with our broader range-bound view on GBP."

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