Key Moments
- Nomura analysts maintain a constructive stance on EUR/GBP as UK wage and inflation trends indicate further monetary policy convergence with the Euro area.
- Recent UK inflation figures have slightly reduced the probability of a March rate cut, mainly due to stickier services inflation relative to Bank of England expectations.
- Upcoming UK political events, including a by-election in a traditional Labour stronghold, are viewed as an under-priced risk for GBP and supportive of Euro outperformance.
Labor Market Developments Support Easing Bias
Nomura Research Analysts Dominic Bunning and Yusuke Miyairi highlight that UK labor market conditions and wage dynamics continue to favor additional monetary policy convergence with the Euro area. They point to ongoing softness in the labor market, led in particular by private sector wage trends, as reducing the likelihood of a sustained move higher in wage-setting behavior.
According to the analysts, the UK unemployment rate has increased by a greater extent than in many other developed economies. While certain indicators, such as PAYE jobs, have shown some moderation in their downward trajectory, Nomura judges that the broader labor picture still argues for continued policy easing.
Inflation Data Complicate Near-Term Rate Cut Expectations
The analysts note that the latest UK inflation release poses a challenge to their expectation for a rate cut in March. They observe that headline inflation came in broadly aligned with consensus forecasts, though it was marginally above the Bank of England’s projection.
More importantly, services inflation proved firmer than anticipated, exceeding the Bank of England’s expectation by 0.25 percentage points. In their assessment, this stickier services print could create additional hesitation among swing Monetary Policy Committee members in the near term and slightly lowers the odds of a rate move in March.
| Indicator | Outcome vs Consensus/BoE | Implication |
|---|---|---|
| Headline inflation | In line with consensus; slightly above BoE forecast | Limited challenge to expectations overall |
| Services inflation | 0.25ppt higher than BoE expected | Reduces probability of a March rate cut |
Monetary Policy Convergence Seen as Positive for EUR/GBP
Despite the near-term uncertainty around the timing of the first rate cut, Bunning and Miyairi argue that the broader path of services inflation is still consistent with further alignment between UK and Euro area monetary policy. They contend that a continued narrowing of EUR-GBP front-end rate differentials would be supportive for the EUR/GBP currency pair.
On this basis, the analysts maintain a bias in favor of Euro strength versus the Pound, underpinned by the view that relative rate spreads can move further in the Euro’s favor.
UK Political Risk Viewed as Under-Priced for GBP
With the latest major data releases largely digested, Nomura expects market focus to turn to political developments. While the upcoming PMIs are identified as a point of interest, the analysts emphasize their inherent month-to-month volatility.
Attention is instead expected to shift toward next week’s UK by-election in a traditional Labour Party stronghold. The analysts suggest that a defeat for the incumbent Labour Party in this constituency would intensify pressure on Prime Minister Starmer and raise the chances of a change in leadership to what they describe as a potentially less market-friendly configuration in the months ahead.
They see this scenario as an under-appreciated source of risk for GBP and, consequently, as a factor that could underpin Euro outperformance against the Pound.
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