This makes Christmas shopping in London an expensive affair

Under new Prime Minister Keir Starmer, the United Kingdom and the European Union are moving closer together. However, this does not apply to the pound and the euro. A weekend in London only seems to become more expensive for the time being.

The pound has been slowly but surely gaining ground against the euro since the end of 2022. The strength of the British currency can be partly attributed to the policy of the Bank of England (BoE), which keeps the policy rate a bit higher than on the continent. Next Thursday, the difference will become even bigger. The European Central Bank (ECB) has been sorting out for some time that the interest rate will be lowered again during the policy meeting. Another reason for the strength of the pound is the political calm in the United Kingdom. At the end of this month there will be a good example of how much has changed in that respect.

Pay attention
Anyone who wants to see that example should pay close attention. There is a good chance that many newspapers and news websites will pay little attention to the publication of the British budget on 30 October. And precisely because it is likely to be a non-event, the contrast with the political chaos of just a few years ago could hardly be greater. In 2022, then Conservative Prime Minister Liz Truss unveiled a mini-budget that included no less than £45 billion in tax cuts, without any savings to match. In comparison, the BBB's 'free beer motion' last year seems child's play.

Lowest price ever
Financial markets were shocked by the British budget. The prospect of a sharp increase in government debt caused the sale of UK government bonds. Interest rates on government debt soared and the pound plummeted to its lowest level ever against the dollar. Eventually, the BoE had to intervene by promising to buy £65 billion in government bonds, while Truss had to swallow her financial plans. A few weeks later, she was replaced by party colleague Rishi Sunak, who lost the House of Commons elections to the Labour Party in the summer. Party leader Keir Starmer has already promised to present a balanced budget, although he is keeping his cards close to his chest.

Inflation nearing target
In anticipation of the budget, the British inflation figures will first attract attention on the currency markets tomorrow. Inflation is expected to have fallen to 2,1%, which means that the BoE target of 2% has almost been met. In that case, the way will be clear for the central bank to further reduce the policy rate. Usually, a falling interest rate leads to a cheaper currency, but if the BoE cuts the rate as quickly as the ECB, the interest rate differential will continue to work in favour of the pound. The policy rate is significantly higher on the other side of the Channel than on the continent. For the time being, it looks like it will be an expensive affair for those who want to travel to London for the Christmas shopping.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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