Euro inches higher from yearly lows as British Pound eases ahead of UK budget

• EUR/GBP rises to 0.8370, remaining close to its 17-month low at 0.8360.
• Ahead of the UK budget announcement, the Pound is weakening against its major counterparts.
• October brought a further decline in German consumer sentiment as consumers' income fell despite an improvement in economic expectations.

After a fall of nearly 3% over the last five weeks, EUR/GBP has recovered to session highs above 0.8370, although it has so far struggled to pull clear of its 17-month low at 0.8360. A weaker British Pound (GBP) is lending the Euro (EUR) some support on Wednesday as markets await the first budget from Prime Minister Andy Burnham’s cabinet.

Chancellor John Healey’s budget dominates Wednesday’s UK agenda. Particular attention will fall on his plans to fund the tax exemptions announced by the cabinet to help British citizens cope with the cost of living.

Public sector net debt exceeding GBP 3 trillion for the first time, equivalent to approximately 95% of the country's Gross Domestic Product (GDP), put the UK’s public finances under scrutiny earlier this year. Although the previous Chancellor, Rachel Reeves, left a buffer of GBP 23.6 billion, sharply higher debt costs are likely to have absorbed a substantial part of it. Traders remain on edge amid nervous bond markets, with memories of Liz Truss' 2022 fiasco still fresh.

German consumer sentiment weakens further

October’s German GfK Consumer Confidence Survey points to another deterioration in Eurozone consumer sentiment. The index slipped from -30.6 in September to a five-month low of -30.8, though it remained above the market consensus of -31.0. 

A mixed picture emerges from the report published by the Nuremberg Institute of Market Decisions: economic expectations improved for the sixth consecutive month, but willingness to buy continued to weaken and income expectations worsened. 

Thursday’s European Central Bank (ECB) monetary policy decision is the main event on this week’s Eurozone calendar. Following September’s quarter-point increase, the bank is widely expected to hold its Rate on Deposit Facility at 2.5%. President Christine Lagarde, however, is likely to signal further monetary policy action in the near term.

Drawing attention to the latest ECB Q3 Bank Lending Survey, Danske Bank analysts note that banks "tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France." Danske Bank interprets this pattern as one that "suggests that ECB's tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth."