EUR/GBP: Rate convergence supports long bias – Nomura

FXStreet Insights Team FXStreet

Nomura Research Analysts Dominic Bunning and Yusuke Miyairi argue that UK wage and inflation data still point to further monetary policy convergence with the Euro area, while rising UK political risks are seen as under-priced and supportive of Euro outperformance versus Pound.

Labour softness and politics back Euro

"We still see enough downward momentum in the labour market – particularly in private sector wage trends – that the hawkish risk of a sustained shift higher in the overall wage setting is diminishing. The UK unemployment rate has risen much further than most of its developed market peers, and while some downward momentum has slowed (in PAYE jobs for example), the overall picture still supports ongoing easing."

"Today’s inflation data were more of a challenge to our view of a March rate cut. Although headline inflation was in line with consensus (albeit slightly higher than the BoE’s forecast), services inflation was somewhat stickier (0.25ppt higher than the BoE expected). This may create a little more consternation for swing MPC voters in the short-term and marginally reduces the possibility of a March rate cut."

"That said, the overall trajectory of services inflation still seems to support ongoing monetary policy convergence with the euro area, in our view. An ongoing narrowing in EUR-GBP front-end rates spreads would be positive for the currency pair."

"With this week’s major data out of the way (the PMIs on Friday will be a focus but are always subject to volatility month-to-month), the market will now start to concentrate on next week's UK by-election. A loss for the incumbent Labour Party in this traditional stronghold would ramp up pressure even more on PM Starmer and increase the likelihood of a change in leadership to a potentially less market-friendly combination in the months ahead, which remains an under-priced risk for GBP, in our view."

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

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