• The euro dips below 0.8700 to hit 5-week lows near 0.8600.
• Rumors of a U-turn on the UK tax plan boost the sterling.
• Longer-term, the pound will suffer on liquidity concerns – Danske Bank.

The euro is depreciating sharply against a stronger British pound on Thursday. The pair has extended its reversal from week lows near 0.8870 on Wednesday, to levels right above 0.8600, its lowest price since early September.

GBP rallies on rumours about a U-turn on the UK fiscal plan

Unfazed by the impact of the US inflation data, the pound is rallying against most majors, boosted by news that the UK Government might be discussing changes in the mini-Budget that roiled markets last month.

Furthermore, additional reports pointing out the possibility that the Bank of England might extend bond purchases beyond Friday, the day announced as the deadline of the emergency plan earlier this week, have contributed to easing pressure on the cable.

In absence of first-tier macroeconomic indicators in the UK or the Eurozone. The enthusiasm about the fiscal plan seems to have offset the potential negative impact of a series of downbeat UK data released on Wednesday.

According to National Statistics, the UK economy contracted at a 0.3% pace in September, against expectations of a flat reading and following a 0.2% increase over the previous month. Beyond that, manufacturing production slumped at a 1.6% pace also against expectations of a 0% reading.

 EUR/GBP seen at 0.89 in the next three months – Danske Bank

Currency analysts at Dnske Bank are showing little confidence on the current GBP recovery as they see the pound suffering on liquidity concerns: “We forecast EUR/GBP at 0.89 in 3M as we expect to see fragile risk appetite, where liquidity concerns weigh on GBP. Further out, we remain cautiously optimistic that the cross will head lower as a global growth slowdown and the relative appeal of UK assets to investors are positive for GBP relative to EUR.”