EUR/GBP hovering near support as UK fiscal caution faces fresh test - Rabobank

The Pound Sterling (GBP) has had a good run in recent weeks. Notwithstanding cable's uptrend this year, EUR/GBP has dropped from the year's high close to 0.8738 on April 11 to below 0.84, where it is currently finding good support from the 200-day sma close to 0.8383. The enthusiasm for the EUR in March can be explained by the market's strong reaction to Germany's decision to loosen its debt brake. This was widely seen as a 'game-changer' for German growth medium-term given the defence spending and infrastructure projects which are expected to be unleashed, Rabobank's FX analyst Jane Foley notes.

Pound strength tested ahead of UK spending review, EUR support remains

"By contrast, March brought the Spring Statement for the UK which brought a halving in the OBR's UK growth forecast for 2025 and a stark reminder of the tight rope that UK Chancellor Reeves was walking to avoid breeching her own fiscal rules. More recently, the UK has seen a flurry of better news, which has helped lift the pound. That said, on June 11 the Chancellor will deliver her Spending Review which could again highlight the UK's difficult fiscal position."

"While concerns on this front may give GBP bulls pause for thought, the UK is clearly not the only country with a 'too high' debt burden.  Indeed, the fact that the UK government at least recognises the constraints of living outside its means should provide GBP investors with some reassurance. We expect EUR/GBP to hold close to 0.84 in the coming weeks. That said, in the absence of better data on UK growth going forward, we see risk of EUR/GBP edging up to 0.87 on a 12-month view."

"If the UK can continue its recent run of better-than-expected news, the 200 day sma would be in danger.  A break below could put the April low close to EUR/GBP0.8323 in view. That said, the Spending Review will likely be uncomfortable for both the government and investors alike. Also, while the EUR may be due a bout of profit-taking after this year's move higher, Germany's relatively better debt position and expectations for better growth in 2026 and should provide longer term support for the EUR."