GBP to EUR: Pound Gives Up Strong Gains on the Day

GBP EUR Higher Ahead of PMI Business Activity

The GBP to EUR exchange rate is pulling back from a surge higher, which almost hit the 1.1700 level as traders anticipate a second quarter rebound for the economy. Boris Johnson’s reopening plan was maybe more cautious than some had hoped but the country will be open in stages to a full opening in the last month of the second quarter. Investors are also looking ahead to the Chancellor’s budget next week and this could see further support for businesses and the jobs market.

GBPEUR has a target of 1.2000, which was the high for the pair in April 2020.

Sunak Prepares for Tax Raids

Traders are looking ahead to the UK budget with hopes for stimulus measures to support the economy. However, they know that these will likely be paid for with heavy hits to taxpayers and savers.

The Chancellor will announce his next budget on March 3rd and tax reforms are on the table as he looks to boost economy. The Telegraph is suggesting that Mr Sunak could hit pensioners with the 25 percent tax-free pension cash benefit at risk. The report said:
“The risk of this happening eventually is high. It may not be in this Budget though, as it doesn’t immediately collect large amounts of tax.”
Sunak is also set to raise corporation tax in what could be a budget of highs and lows for the British pound.

Treasury officials are apparently looking at the potential for increasing the tax on companies from the current 19% to 25%, with every percentage point generating around £3billion. This could spark fury in the Tory government and put a headwind on the UK’s recovery. Analysts are already questioning why a government would exit the European Union and then hike corporate taxes, which will put the shackles on business growth.

A Closer Look at Inflation Figures in Europe and UK

The month of February has seen higher inflation in the UK, with a marked bounce in the Eurozone, which had struggled with deflationary pressures. Investors globally are now starting to chatter about higher inflation with the US 10-yr yield benchmark squeezing higher. Central banks have uniformly set a target of 2% for inflation, but the free market could pressure their expectations and their plans for rate rises in in 2023.

The reality is that inflation is moving higher despite the ongoing lockdowns and the Bank of England has noted the UK’s £125bn in household savings. The bank said that figure could double by June and it’s maybe no coincidence that they mentioned this month last week before Boris suggested the full reopening for then.

Some reasons for yesterday’s rise in European inflation were Germany’s VAT increase and delayed winter retail sales that usually occur in January. Prices are measured against last year’s sales discounts, which increases the inflation figures, and this effect will reverse once the sales happen. Energy prices have also been higher with oil over $60 a barrel in the month of February.

Central banks are confident that letting consumers free this year will not see follow through into higher inflation but that will be seen in the months ahead.

GBPEUR is still higher on Tuesday by almost 0.30% and sterling may start to see profit taking ahead of the Chancellor’s budget.

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