Synopsis:

Goldman Sachs sees scope for continued GBP outperformance against the euro, driven by the UK's relative resilience to tariff risks and a more disciplined fiscal approach compared to the Eurozone. While recent EUR/GBP moves align with historical correlations, the broader repricing of the euro following Germany’s fiscal announcements may continue to create divergence.

Key Points:

1️⃣ GBP Resilient to Tariff Risks 🇬🇧

• Sterling has shown relative strength as EU tariff risks increase.
• This divergence is expected to persist, supporting GBP vs. EUR.

2️⃣ EUR/GBP Repricing Driven by German Fiscal Policy 🇩🇪

• Last week's EUR/GBP rally (+1.9%) aligns with EUR/USD’s gains.
• The move followed Germany’s fiscal announcement, which is driving broader euro repricing.

3️⃣ UK’s Fiscal Approach More Stable 📉

• UK plans to raise defense spending to 2.5% of GDP by 2027, with an aspirational 3% target.
• Unlike Germany, the UK aims to keep increased spending deficit-neutral, reducing fiscal concerns.

4️⃣ Market Confidence in UK Policy Growing 📊

• Chancellor Reeves has emphasized spending cutbacks to reassure markets.
• This contrasts with growing fiscal uncertainty in the Eurozone.

Conclusion:

Goldman Sachs sees further GBP strength against the euro, with the UK’s relative insulation from tariff risks and a more disciplined fiscal stance supporting sterling. As Germany’s fiscal challenges continue to weigh on the euro, GBP could extend its outperformance versus European currencies.