EUR/GBP: A more hawkish ECB vs a BoE facing UK recession risks may support the medium-term outlook – Citi

Economists at Citi analyze EUR/GBP outlook ahead of ECB and BoE meetings.

ECB likely to keep rates higher for longer than BoE

A more hawkish ECB vs a BoE facing UK recession risks may support the medium-term outlook for EUR vs GBP as ECB keeps financial conditions tighter for longer than most other central banks, including the BoE. This then leads to a significant narrowing in EUR/GBP rate differentials in 2024 and a stronger EUR/GBP cross.

A risk to this more positive EUR view is the lack of a Chinese recovery given Euro area’s closer links to China via the export channel. But this risk is likely outweighed by the sharp and sustained rebound in Euro area’s terms of trade from the lows in August 2022 as Europe successfully weans itself from Russian gas.