EUR/GBP to reach last year's highs as BoE set to move into negative territory – MUFG

The pound has underperformed so far this week with EUR/GBP hitting an intra-day high yesterday of 0.9085 up from around 0.8950 at the start of the week. 

The Bank of England (BoE) is moving towards negative rates which could push the EUR/GBP pair towards the 0.94 level, according to economists at MUFG Bank.

See – EUR/GBP seen at 0.87 by the end of the year – Rabobank

Key quotes

“The relative cyclical underperformance is set to continue in the near-term after the UK government announced a third national lockdown in England which is expected at last until March. There is a high risk the lockdown could last longer given the higher transmission of the new COVID-19 variant.” 

“The UK government is now in a race against the virus which is increasing pressure to significantly step up the pace at which vaccines are delivered in the coming weeks and months. If the UK government is successful and leads the way in rolling out vaccines, the pound could eventually benefit from a stronger UK recovery from Q2 onwards. However, we expect things to get worse for the pound before then.” 

“The hit to UK economy from the third lockdown will increase pressure on the BoE to deliver additional monetary stimulus as soon as their next meeting in February. Interestingly, it was announced yesterday that BoE plans to publish research on negative rates in February. We now expect the BoE to move rates into negative territory in February by lowering the key policy rate from 0.10% to -0.15%. We had previously forecast a cut to 0.00%. It should push EUR/GBP back up towards last year’s highs.”