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GBP/EUR Exchange Rate to Rally on Budget Statement? Tax Hike Risks Remain

GBP/EUR Exchange Rate Buoyed ahead of UK Budget 

The Pound to Euro (GBP/EUR) exchange rate is currently drifting higher this morning, amidst a sense of optimism ahead of the publication of the UK’s 2021 budget. 

At the time of writing, the GBP/EUR exchange rate is trading at around €1.1569, up slightly from this morning’s opening rate. 

Will Sunak’s Budget Be Supportive of the Pound (GBP)? 

The Pound (GBP) looks well positioned to strengthen against the Euro (EUR) and majority of its other peers today as Chancellor Rishi Sunak is expected to pledge to do ‘whatever it takes’ to support the UK’s economic recovery in his 2021 budget. 

GBP investors have already been cheered by reports that Sunak will extend the furlough scheme until the end of September as the Chancellor seeks to protect jobs amidst the government’s ‘cautious’ reopening of the economy. 

Sterling sentiment may be improved further by additional stimulus measures aimed at helping businesses reopen and ensure a sustainable recovery in the UK economy.  

However there also remains the question over potential tax hikes, which have been the subject of substantial speculation in recent days, with GBP investors likely to be less than enthused by their inclusion in today’s budget. 

Robert Alster, CIO at wealth manager Close Brothers Asset Management, comments: 

‘The question is how Rishi Sunak will balance the need for short term support while addressing the long term problem of the deficit. In recent weeks, speculation about tax rises has been rife. Specifically, a reform of capital gains tax, increasing corporation tax and potential ‘stealth’ taxes in the form of income tax band freezes.’ 

Also of note will be the accompanying economic forecasts from the Office for Budget Responsibility (OBR), which could prove supportive of the Pound if the outlook for 2021 points to a strong recovery of growth. 

Euro (EUR) Supported by Revised Services PMI 

At the same time, the Euro (EUR) is holding its ground this morning following the publication of the Eurozone’s latest Services PMI. 

According to data published by IHS Markit, the Eurozone’s services index rose from 45.4 to 45.7 in February, with the finalised release, being revised up from 44.7. 

While the stronger-than-expected release was welcomed by EUR investors it only provided modest support to the Euro, given it confirmed that the bloc’s service sector still remains in a state of contraction, especially as this likely leaves the Eurozone on track for a double-dip recession.