![]() The overall yield curve should also offer potential Pound support.Īccording to ING “the Bank of England’s aggressive fight against ultra-sticky inflation should keep the GBP curve highly inverted, which can ultimately keep a reserve currency like the pound supported for longer.” It adds “Even so, we expect that GBP will end the year a little softer against the EUR around EUR/GBP 0.87.” (1.1495 for GBP/EUR) It does note that the current account position has improved which will offer some protection to the Pound Weak growth and high inflation are coupled with high national debt and concerns about investment growth. Rabobank maintains a negative stance on the UK economy “We judge the line-up of UK fundamentals as being still fairly sour. We think that will start to happen in 2H23 as rates approach their peak.” The bank added “Sterling can only expect support from higher rates for so long before the growth outlook (and the longer-term interest rate implications of weak growth) takes over. It expects that the UK will have weaker growth and higher inflation than the Euro-Zone in 2023/24. Socgen is still notably uneasy over the UK fundamentals and commented that the UK has a less attractive growth/inflation trade-off than other major economies, especially given the impact of Brexit. That will support GBP for as long as this unusually close correlation between currencies and short-term rates persists and until the rate outlook changes.” Socgen expects near-term Pound support “Random recurrent crises notwithstanding, Sterling is being supported by a faster pace of rate hikes than elsewhere, and markets are now pricing a higher peak in the UK than in the eurozone or US. It adds, according to our FEER simulations, EUR/GBP should be trading close to 0.93-0.94 if concerns about the deteriorating external imbalances escalate significantly.” The bigger risk in the short-term arguably comes from corporates (particularly small firms), which are typically on floating interest rates and are feeling the squeeze most acutely right now.”Ĭredit Agricole considers the Pound is overvalued. Higher mortgage rates will be an important focus and there will be other pressures.Īccording to ING “A recession isn’t inevitable, but we will see an ever-increasing drag on the UK consumer. There will inevitably be fears that high-interest rates will undermine the UK economy. Natixis considers that there is little scope for further buying “the GBP will be poorly placed, given that the rate hikes have already been well priced in. ING adds “By November’s meeting, we think there will be sufficient evidence for the Bank to finally end its hiking cycle.” Remember that one of the Bank’s two arch-doves also left the committee last month, and early signs suggest her replacement will be more hawkish.” ING expects a lower peak at 5.5% “we aren’t convinced the 50bp move will be repeated, but we think two further 25bp moves in August and September are likely – and we wouldn’t rule out more. It also warned that rates could reach 7% under certain scenarios. It adds “we now look for a 5.75% terminal rate by November. JP Morgan expects a hawkish stance “We assume the BOE will pivot to a ‘high-for-long’ strategy with the intention of allowing the lags in transmission to finish off the job.” The UK 2-year yield has also posted a fresh 15-year high above 5.40%. ![]() ![]() There has been a further increase in Bank of England rate expectations this week with markets expecting a peak in rates above 6.35% and also pricing in a 50% chance of a peak of 6.50%. The next few rounds of activity and inflation releases are likely to be crucial for overall GBP/EUR sentiment. ING commented “For now, it remains hard to see a sustained GBP downtrend.” In the short term, yield trends should underpin the Pound, offset by reservations over the fundamentals. There has been a further jump in UK yields and Bank of England (BoE) rate expectations, but risk appetite has deteriorated with a sharp decline in equities. Last week saw the Brtish Pound (GBP) post net gains against the Euro (EUR), briefly hitting a 2-week best conversion around 1.1735.Īfter a dip to 1.1680, the pair recovered to 1.1720. Should this Fundamental Equilibrium Exchange Rate valuation take effect, this would represent a huge 9.67% decline in value for Sterling. This equates to a substantially lower conversion of 1.06 for the Pound to Euro exchange rate (GBP/EUR). Foreign exchange analysts at Credit Agricole suggest the Euro to Pound (EUR/GBP) exchange rate should be tipped to rise to 0.93-0.94, citing their FEER research (Fundamental Equilibrium Exchange Rates) and the resulting overvaluation of Sterling for the pair's gains. ![]()
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