GBP/USD Outlook Brighter, EUR/GBP Dimmer After UK Mini Budget

UK summer statement, GBP/USD and EUR/GBP analysis:

• GBP/USD is well placed to maintain its recent strength after a mini budget consisting of economic measures designed to offset the damage to the UK economy caused by the coronavirus pandemic and the subsequent lockdown.
• EUR/GBP could well weaken further too as the markets react to a program that was broadly in line with expectations, providing a fiscal stimulus – albeit one that may not be sufficient to prevent a relatively weak recovery from the Covid-19 slump.

GBP/USD outlook: further gains possible after mini budget

The outlook for GBP/USD is looking more and more positive after the pair’s breach of the 1.25 level and a package of measures from UK Chancellor of the Exchequer Rishi Sunak designed to protect jobs and help the UK economy recover from the devastation caused by the coronavirus pandemic and the lockdown imposed to limit its spread.

While a swift V-shaped recovery still seems unlikely, the measures in Sunak’s summer statement – effectively a mini budget – will provide a substantial fiscal boost which, coupled with loose monetary policy, should ensure that the impact on both businesses and individuals is as limited as possible.

GBP/USD Price Chart, One-Hour Timeframe (June 30 – July 8, 2020)

Chart by IG (You can click on it for a larger image)

Sunak’s measures should also ensure that EUR/GBP continues to slide lower after its tentative move below 0.90 but the impact on the FTSE 100 index of the major London-listed stocks will likely be limited outside the housebuilding, hospitality and leisure sectors.

EUR/GBP Price Chart, One-Hour Timeframe (June 29 – July 8, 2020)

Chart by IG (You can click on it for a larger image)

Sunak said his plan for jobs would be worth up to £30 billion. Among the measures he announced, many of which had been signaled already, were:

• A £1,000 bonus for each employee who returns to work from furlough,
• An extra £1 billion for the Department for Work and Pensions,
• £2 billion of green housing grants,
• A cut in stamp duty to help the housing sector,
• A cut in value added tax (VAT) on the hospitality and tourism sector, and
• An “eating out” discount off meals and non-alcoholic drinks.

Brexit deal ahead?

Looking further ahead, the UK-EU talks on their long-term relationship post Brexit will likely become increasingly important for traders in Sterling assets. The two sides appear less far apart than they were, suggesting that a last-minute deal – albeit a very modest one – could be agreed before the end of the transition period on December 31.

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--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via Twitter @MartinSEssex