EUR/GBP: Time for a breather? – Rabobank

Analysts from Rabobank see the risk of the EUR/GBP cross rising to the 0.90 area early in 2023. They point out that risks of a general election in the UK could rise if PM Sunak fails to gain support of most Tory MPs. 

Key Quotes: 

“In our view both the EUR and GBP will be battling demons in the months ahead. The EUR has had good news recently in the form of an easing in gas prices. Warm weather and mostly full gas storage stations have reduced the risk of blackouts in the Eurozone during the forthcoming winter.”

“A 75bp rate hike from the ECB in October has lent the EUR some protection, but by the central bank’s next meeting, Germany could be in recession. It is unclear whether hiking interest rates into a recession will be able to give the EUR much support.”

“The UK’s current account deficit has further exposed the GBP to the impact of the weak line up of fundamentals. Relief that the new PM and Chancellor understand both the necessity of working with the BoE to bring down inflation and the risk to the gilt market of unfunded tax cuts, has seen gilt yields and GBP settle back after recent volatility. However, the coming months will not be easy for PM Sunak.”

“If Sunak cannot muster the support of most Tory MPs, there is a risk that a general election may have to be called. Even if the party does unite, the government is set to announce tax hikes next month in the face of a recession and despite the cost of living crisis. Not only will this be difficult for the electorate to stomach but, in the absence of reforms aimed at encouraging investment and productivity growth, GBP’s recovery may already have run out of traction. We see risk of EUR/GBP climbing to the 0.90 area early next year.”