EUR/GBP: What went wrong? – Rabobank

Jane Foley, Head of FX Strategy at Rabobank, explains that in mid-April GBP traded at its best levels vs. the EUR since May 2017, fed by optimism on the political front and expectations of further policy tightening from the BoE and by early May, however, the pound had given back many of its recent gains. 

Key Quotes

“In February, the BoE delivered strong guidance that further policy tightening was on the cards and the market duly prepared for a rate hike in May. Strong economic data, however, has not been forthcoming. The acknowledgement from BoE Governor Carney in mid-April that “we have had some mixed data” and that he is “conscience that there are other meetings over the course of the year” severely dampened expectations for a May rate hike. These took another lunge lower on the release of the UK Q1 GDP data showing a dismal 0.1% q/q rise.” 

“While a softer economic backdrop and market expectations of a less hawkish BoE are suggestive of a softer outlook for the pound, politics are likely to feature heavily in the coming months. The lack of an acceptable solution on the Irish border puzzle has recently been supporting speculation that the chances of the UK remaining within the customs union post Brexit have risen. While this would remove some uncertainty, it is difficult to argue that this would be supportive for GBP since such a scenario would reduce the PM’s credibility and could mark the end of her government.”

“It remains our house view that the bones of a UK/EU free trade agreement will be on the table before the start of Brexit in March 2019. For this reason we are forecasting a stronger pound on a 12 month view. That said, there is a very short timeframe to hammer out an agreement on trade and we expect political uncertainty to pressure GBP during much of the reminder of 2018.”