British Pound: Sterling pressured into autumn against Euro – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses recent British Pound (GBP) weakness versus the Euro (EUR), linking it to reduced Bank of England (BoE) tightening expectations and political developments under UK Prime Minister Burnham. Foley highlights fiscal flexibility ahead of the October 28 budget and sees markets still overpricing BoE rate hikes. Foley prefers buying EUR/GBP on dips, targeting higher levels.

Rabobank sees scope for EUR/GBP gains

"From late June into early July, the pound staged a rally vs. the EUR. That subsequently went into reverse at the start of last month with the EUR/GBP currency pair trading sideways in recent sessions. Insofar as the UK parliament is now in recess until the start of September, the political newsflow can be expected to be sparse."

"That said, some news regarding the forthcoming budget has been seeping out and this could be setting up both the gilts market and GBP for friction into the autumn."

"While the budget threatens to cast a shadow over the pound post summer, it remains RaboResearch’s view that the market has overestimated the risk of BoE rate hikes."

"For the UK, the market is currently pricing in a reduced expectation of a rate hike by the end of the year, though in our view this is still too aggressive."

"A re-pricing in policy expectations towards steady policy from the BoE this year combined with the prospect of nervousness ahead of the October budget suggests scope for downside pressure on the pound as the summer draws to a close. We favour buying EUR/GBP on dips to the 0.8550 area. A break above the recent high in the 0.8588 region could increase upside potential."