EUR/GBP: “Sausage war” ceasefire helps to ease downside risks for pound – MUFG

The stronger US dollar is pulling down cable closer towards the lows from March and April at around 1.3650 which is where the 200-day moving average is located as well. In contrast, the pound has been grinding higher against the euro which has seen EUR/GBP move closer to the April low at 0.8472. Overall, economists at MUFG Bank continue to maintain a bullish outlook for the pound against the euro. 

Bank of England Governor Andrew Bailey's public appearance is on focus

“The pound is benefitting from the hawkish repricing of BoE rate hike expectations which have been brought forward following the last FOMC meeting. Market participants still expect the BoE to follow the Fed and adopt a more hawkish policy stance and open the door to rate hikes as soon as next year.”

“We expect the BoE to wait until later this year/early next year to provide a stronger signal that rates are likely to begin to rise from next year when they have clearer evidence of the fallout for the UK labour market when government support measures are brought to an end.”

“The spread of the new Delta variant even if it does not trigger tighter restrictions will threaten to undermine confidence if cases continue to rise sharply. BoE chief Economist Haldane also voiced concern yesterday that inflation could reach almost 4% by the end of this year which would further undermine purchasing power. Market participants will be watching Governor Bailey’s annual Mansion House speech today for any fresh policy signals.”

“The EU has agreed to a temporary ceasefire with the UK in the ‘sausage war’ by extending the grace period for shipments from Britain to Northern Ireland. The grace period on chilled meat products had been due to end on 1 st July and has now been extended for a further three months. Britain has welcomed the extension but still seeks a permanent solution. The ceasefire reduces the risk of a flare up in trade tensions between the EU and UK, and downside risks for the pound in the near-term.”