GBP: Macro, not fiscal, weighing now – ING

In quiet markets, the EUR/GBP run-up to 0.8700 has been notable, ING's FX analyst Chris Turner notes

EUR/GBP to grind towards 0.88 a lot sooner

"This softness in sterling has not been driven by the fiscal side. In fact, the 10-year Gilt-Bund spread has narrowed back into 187bp – the tightest since early April. No, it has been the narrowing in shorter-dated interest rate spreads that is weighing on the pound. Here, the two-year EUR:GBP swap differential has narrowed back into 157bp as investors question whether the Bank of England will have to ease policy faster than once per quarter."

"On that subject, we'll hear from Bank of England Governor Andrew Bailey tonight at 22CET as he delivers his annual Mansion House speech alongside Chancellor Rachel Reeves. Expect Governor Bailey to reiterate a position – similar to the Fed – that faster easing is possible if the labour market deteriorates."

"On this latter point, after tomorrow's release of June CPI, Thursday sees some important UK labour market data. Should the May payroll release of -109k stay unrevised and should there be further payroll declines in June, UK rates and sterling could see another leg lower. Our forecast preference had been for EUR/GBP to grind towards 0.88 over the coming quarters. That could come a lot sooner if the labour market weakens."