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Investing.com - The United Kingdom (TADAWUL:4280) reported higher-than-expected government borrowing of £20.7 billion for June, surpassing forecasts from the UK fiscal watchdog, according to analysis released Tuesday by ING.
The Dutch financial services firm noted that while the borrowing news had no immediate significant impact on the pound, it likely increases the probability of tax increases in autumn 2024, potentially limiting upside for the British currency.
ING estimates that markets are currently attaching a risk premium to the EUR/GBP pair, calculating an approximate 0.8% overvaluation that approaches the upper bound of what would signal stretched misvaluation. This premium partly stems from the euro’s strength as a reserve currency but may also reflect UK budget concerns.
Recent UK economic data has not supported market speculation about accelerated Bank of England easing, with two-year GBP swap rates approximately 8 basis points above last week’s lows. Market expectations now align with ING’s forecast for interest rate cuts in August and December.
The rewidening of the EUR/GBP short-term rate differential favoring the pound over recent weeks, combined with EUR/GBP’s resilience, further supports ING’s assessment of a non-negligible risk premium being applied to the British currency.
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