EUR/GBP: Political risks and energy shock – Rabobank

Rabobank’s Senior FX Strategist Jane Foley highlights that the Pound has recently outperformed the Euro, helped by fading expectations of Bank of England rate cuts, even though neither currency is seen as a safe haven. The bank expects EUR/GBP to hover near 0.87 over 1–3 months, but sees UK political risks, higher energy prices and sticky UK inflation pushing the cross modestly higher in H2.

Rabobank sees EUR/GBP grinding higher

"It is likely that GBP’s better tone vs. the EUR in recent sessions has been derived from a loss of hope regarding the prospects of BoE rate cuts in the coming months. We maintain the view that EUR/GBP is likely to hold around the 0.87 area on a 1-to-3-month view, though we expect UK political concerns to push the currency pair modestly higher during in H2 with the May UK elections potentially triggering a leadership challenge for PM Starmer."

"Clearly the impact of elevated energy prices on inflation in the UK and elsewhere will depend on how long disruption in the Strait of Hormuz continues. Our energy strategists are of the view that it may last. Rabo’s view is that UK CPI inflation may no longer fall back to just above the 2% level as previously forecast but may edge down to 2.5% before rebounding to 2.75% in Q3."

"May brings local elections in England and parliamentary elections in Scotland and Wales. A poor showing for Labour could trigger a leadership challenge. Given the UK’s high level of debt, GBP is likely to be particularly sensitive to a strong candidate from the left wing of the party. Consequently we see risk that GBP will be on the back foot into the middle of the year and beyond, and see scope for EUR/GBP to grind higher in H2."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)