ING’s Chris Turner highlights a sizeable downside breakout in EUR/GBP driven by stale Sterling shorts and lower FX volatility reducing appetite to pay carry. He sees that mindset persisting near term but warns UK politics could return later in July, with limited fiscal space and no Bank of England hikes expected, potentially prompting Sterling to give back some gains.
Sterling breakout and looming UK politics
“EUR/GBP delivered a sizeable downside breakout last week, which should be respected. Helping that move were stale sterling shorts and a view that if volatility was falling this summer, there was no point in paying away 2% per annum in carry by being short sterling if FX pairs were going to remain relatively static. It is hard to see that mindset being challenged this week.”
“However, later this month UK politics will return to the market, where Makerfield MP Andy Burnham could become Prime Minister on 20 July and announce his new chancellor shortly thereafter. The favourite for the post of chancellor is Energy Secretary Ed Miliband, who stands further to the left and is being pushed by the party to avoid the incrementalism witnessed during the Starmer/Reeves years.”
“The problem remains, however, that there is very little fiscal room for adjustment without raising taxes. This, along with our call that the Bank of England does not raise rates this year, could see sterling hand back some of its recent gains.”
“Let’s see if EUR/GBP support at 0.8545 can hold before politics returns to play a role in markets later this month.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
