EUR/GBP: Slow creep higher risk – Rabobank

FXStreet Insights Team FXStreet

Rabobank’s Senior FX Strategist Jane Foley notes that the Pound has outperformed since late February, while the Euro has lagged, with recent EUR/GBP gains largely tied to fading expectations of a March BoE rate cut and positioning effects. Rabobank still sees risk that EUR/GBP trends higher in coming months and even towards 0.89 by year-end, as UK-specific risks and energy-driven inflation concerns weigh on Sterling.

Rabobank flags renewed upside in EUR/GBP

"While we would ascribe the gains in EUR/GBP over the past week mostly to the loss of hope of a March BoE rate cut, it is likely that positioning has had an impact on how the current uncertainties are affecting various currencies. We continue to see risk that EUR/GBP will revert to a slow creep higher in the coming months."

"Against the backdrop of disappointing UK growth data last year, the BoE’s easing cycle and the risk of a leadership challenge to PM Starmer, CFTC data suggest that speculators have been maintaining short GBP positions for some time. By contrast the market has been long EUR since early spring last year. This will have been linked to the boost in optimism regarding the Eurozone growth outlook following the changes to Germany’s debt brake."

"In recent weeks, these long EUR positions have been pared with the market no doubt concerned about the impact of higher energy costs on the regions’ industrial output. Market expectations of ECB rate hikes into next year have also firmed up, though Rabobank doesn’t expect the ECB to be in any rush to alter policy settings."

"While it is likely that short-covering has offered GBP some support over the past week, we would expect this to run out of steam. The UK economy is still precariously positioned in between sticky inflation, high public debt, a current account deficit and (dependent on the duration of the energy price shock) a potentially still inadequate fiscal buffer."

"Faced with this possibility, we would expect the recent positive impact on GBP from position adjustment to run out of steam. We see risk of a move to EUR/GBP 0.89 towards year end."

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

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