Sterling gains upper hand against euro on improving fundamentals
2024-01-09
Summary:
On Tuesday, the pound stayed near its three-week high against the euro, touched the previous week amid expectations of an ECB rate cut before the BOE.
The pound remained close to its strongest in three weeks against the euro on Tuesday, a level touched the week before on expectations the ECB will cut rates before the BOE.
Signs of the UK’s journey from outlier to convergence were behind the rally, but those will be tested later this week by Andrew Bailey’s parliamentary hearing and a monthly GDP print.
Core inflation in the UK remains higher than in the US and the eurozone, but it begins to slow more sharply more so. It is noteworthy that the country eased its COVID-19 restrictions later than its peers.
GDP has been revised sharply higher and is now almost 2% above its pre-pandemic level, on par with France, Japan, and Spain, even better than in Germany. The final S&P Global/CIPS UK PMI also was revised higher last week.
Current market pricing shows reflects a 75% chance of a 25-bp BOE rate cut in May, and they are fully pricing one such cut by June, while a 25-bp ECB cut has been priced by April.
However, according to Governing Council member Boris Vujcic, the ECB is unlikely to lower borrowing costs before the summer due to “a mild cooling, without a recession” while achieving the inflation target.
EUR/GBP has been range-bound since mid-Q2 2023. The risk-reward looks attractive to enter long positions at around 0.8500 if it continues to head towards the lower end of the band.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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