EUR/GBP: Political strains and BoE doubts – Commerzbank

Commerzbank’s Michael Pfister argues that recent strength in the Pound (GBP) is unlikely to last, as ambitious Bank of England (BoE) rate expectations and renewed political risks weigh on the outlook. The bank forecasts EUR/GBP rising towards 0.89 in coming weeks, while GBP/USD is seen gradually appreciating over the longer term, with current Pound levels not expected to be revisited until 2027.

BoE repricing and UK politics threaten Pound

"Of the G10 currencies, the pound is one of only five to have posted a positive performance since the start of the war, alongside the four major commodity exporters. This surprising performance is based on two factors: the Bank of England (BoE) is expected to respond very decisively, and the political risk premium was priced out in early March. However, we doubt the sustainability of these factors, which is why we expect the pound to weaken in the coming months."

"Instead of anticipating two rate cuts by the end of the year, the market has at times priced in more than three rate hikes. This massive correction naturally gave the pound a strong boost."

"We doubt that the Bank of England will meet these expectations."

"The BoE may raise rates once, but the focus is likely to shift back to rate cuts in the second half of the year. If the market moves in this direction as well, the GBP gains driven by ambitious rate expectations will likely be priced out again."

"Given the ambitious BoE expectations and the ongoing political risks, we believe there is a strong possibility that the pound will come under pressure again in the coming weeks. Although EUR/GBP is now trading close to the 0.86 level again, if the local elections yield a poor result for Labour, the exchange rate is likely to trend towards 0.89."

"Nevertheless, political risks are unlikely to persist indefinitely, so we expect a recovery to begin in the second half of the year. But the current level is unlikely to be reached again until 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)