British Pound: Sterling faces fiscal and BoE risks – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses how United Kingdom (UK) Chancellor Healey’s pro-growth rhetoric and commitment to fiscal rules have left questions over funding, with EUR/GBP still range-bound. Foley highlights the Pound’s vulnerability due to high foreign ownership of gilts and market pricing for Bank of England (BoE) rate hikes, expecting EUR/GBP to drift higher towards 0.87 over three months.

Pound seen vulnerable to policy risks

"While EUR/GBP did reach the lows of the day around the time that Healey wrapped up his presentation, the currency pair has stayed within the range drawn last Friday."

"As we have pointed out before, the gilts market has the potential to be particularly sensitive to negative budget related news because of the relatively high amount of foreign ownership. Overseas buyers can be more reactionary to a souring of the news flow, and in the case of the gilts market this can have a detrimental impact on the pound."

"By contrast, worrisome news on the French budget in recent years has seen sellers move into other Eurozone bond markets leaving little impact on the EUR."

"This positioning may leave the pound vulnerable. A hawkish takeaway from the BoE meeting next week is already priced in, meaning that the pound could slip on anything that can be construed as dovish."

"On the back of this factor, coupled with the pound’s potential sensitivity to fiscal matters, we expect EUR/GBP to be biased higher, towards 0.87 on a 3-month view."

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