Pound undermined by UK’s £22bn ‘black hole’

The pound dipped on Monday as UK Chancellor Rachel Reeves delivered her statement on the ‘spending inheritance’ left by the previous government.

Sterling continues to struggle this morning, with GBP/EUR subdued at €1.1878 and GBP/USD flat at $1.2854. GBP/CAD is muted at CA$1.7795, while GBP/AUD slips to AU$1.9600 and GBP/NZD retreats to NZ$2.1793.

Looking ahead, will a robust Eurozone GDP print offer support to the euro this morning?

What’s been happening?

The pound stumbled out of the gate this week as Rachel Reeves outlined the current state of the UK’s public finances in a speech in Parliament.

The UK Chancellor told MPs that the Labour government had been left a £22bn gap in public finances this year and that cuts would need to be made to cover this shortfall.

This initially triggered fears Reeves would unveil a new round of tax rises, leading Sterling to fall, before the pound clawed back some of its losses as the Chancellor ruled out any immediate changes on tax.

In contrast, the US dollar got off to a positive start this week, as renewed tensions in the Middle East weakened market risk appetite and bolstered demand for the safe-haven currency.

However, the upside in the US dollar remained limited in scope, with USD investors reluctant to make any big bets in advance of some high-impact data releases later in the week.

The euro, meanwhile, was pressured on Monday by its negative correlation with the US dollar and caution ahead of the Eurozone’s latest GDP and inflation figures.

What’s coming up?

Today’s session sees the publication of the Eurozone’s first GDP estimate for the second quarter.

Most market participants expect the figures to report the Eurozone economy expanded at a steady pace in the three months to June, which could help underpin the euro this morning. However, some analysts are predicting a modest deceleration of growth in Q2, which could weigh heavily on the single currency.

Also of note to EUR investors will be Germany’s latest inflation figures. Will a stable reading help to limit any potential weakness in the euro?

On the other side of the Atlantic, the focus will be on the latest US job openings and labor turnover survey (JOLTs), with the US dollar likely to face some headwinds if it reports job openings continued to fall in June.

Meanwhile, in the absence of any notable domestic data, the pound may be left to trade sideways today, particularly as GBP investors brace for the Bank of England’s (BoE) interest rate decision on Thursday.