Christmas shopping in London is becoming expensive

Under the new prime minister Keir Starmer, the United Kingdom and the European Union are moving closer together again. However, this does not apply to the pound and the euro. A weekend in London seems to only get more expensive for now.

Since the end of 2022, the pound has been slowly but steadily gaining more ground against the euro. The strength of the British currency is partly due to the policy of the Bank of England (BoE), which keeps the policy rate slightly higher than on the continent. This Thursday, the difference will increase even more. The European Central Bank (ECB) has been preparing for some time now to lower the interest rate during the policy meeting. Another reason for the strength of the pound is the political stability in the United Kingdom. At the end of this month, there will be a good example of how much has changed in that regard.

Pay close attention
However, those who want to see that example should pay close attention. The chance is high that many newspapers and news websites will hardly pay attention to the publication of the British budget on October 30. 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 tax cuts totaling a whopping £45 billion, without any corresponding savings. Compared to that, BBB's 'free beer motion' last year was child's play.

All-time low exchange rate
Financial markets were completely shocked by the British budget. With the prospect of a sharp increase in national debt, UK government bonds were being sold off. The interest on the national debt soared and the pound plummeted to its all-time low against the dollar. Ultimately, the BoE had to intervene by promising to buy £65 billion in government bonds, while Truss had to backtrack on her financial plans. A few weeks later, she was replaced by party colleague Rishi Sunak, who lost the parliamentary elections this summer to the Labour Party. Party leader Keir Starmer has already promised to present a balanced budget, although he does not reveal his cards.

Inflation nearing target
Ahead of the budget, tomorrow the British inflation figures will first attract attention in the currency markets. It is expected that inflation has dropped to 2.1%, almost reaching the BoE target of 2%. In that case, the path will be clear for the central bank to further lower the policy rate. Usually, a falling interest rate leads to a cheaper currency, but if the BoE reduces the rate as quickly as the ECB, the interest rate differential will continue to work in favor of the pound. The policy rate across the Channel is significantly higher than on the continent. For now, it seems that it will be an expensive affair for those who want to travel to London for Christmas shopping.

Linda van Eekeres

Linda van Eekeres is a senior contributing editor specialized in macroeconomic trends, logistics, and political impacts on agriculture at DCA Market Intelligence.

l.vaneekeres@farmerbusiness.com

Joost Derks

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

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