EUR/GBP May Climb Gradually as UK Risks Grow: Rabobank

Key Moments

Rabobank Expects EUR/GBP to Grind Higher

Rabobank Senior FX Strategist Jane Foley observes that since late February the Pound has generally outperformed while the Euro has underperformed. She notes that the recent recovery in EUR/GBP largely reflects diminishing expectations for a Bank of England rate cut in March, as well as positioning-related factors. Despite this backdrop, Rabobank still anticipates that EUR/GBP could edge higher in the coming months and potentially approach 0.89 by the end of the year, as UK-specific concerns and inflation pressures linked to energy costs weigh on Sterling.

Positioning and Policy Expectations Under Scrutiny

Rabobank underscores that the latest upside in EUR/GBP has to be viewed through the lens of shifting interest rate expectations and speculative positioning.

“While we would ascribe the gains in EUR/GBP over the past week mostly to the loss of hope of a March BoE rate cut, it is likely that positioning has had an impact on how the current uncertainties are affecting various currencies. We continue to see risk that EUR/GBP will revert to a slow creep higher in the coming months.”

According to Rabobank, speculative data indicate that market participants have maintained short positions in GBP for an extended period, against a backdrop of weak UK growth, the Bank of England’s easing phase, and the perceived risk of a leadership challenge to Prime Minister Starmer. In contrast, speculative accounts have been net long EUR since early spring of last year, a stance that Rabobank links to improved sentiment on the Eurozone growth outlook following adjustments to Germany’s debt brake.

Shift in Euro Sentiment as Energy Concerns Rise

Rabobank notes that, more recently, long EUR positions have been scaled back. The bank attributes this to rising market anxiety over how elevated energy prices could affect industrial output in the Eurozone.

“In recent weeks, these long EUR positions have been pared with the market no doubt concerned about the impact of higher energy costs on the regions’ industrial output. Market expectations of ECB rate hikes into next year have also firmed up, though Rabobank doesn’t expect the ECB to be in any rush to alter policy settings.”

UK Macro Vulnerabilities Seen Limiting GBP Support

Rabobank acknowledges that the Pound has benefited in the near term from short-covering, but the bank doubts that this source of support will be sustained.

“While it is likely that short-covering has offered GBP some support over the past week, we would expect this to run out of steam. The UK economy is still precariously positioned in between sticky inflation, high public debt, a current account deficit and (dependent on the duration of the energy price shock) a potentially still inadequate fiscal buffer.”

Rabobank argues that once the positioning-driven boost to GBP fades, structural challenges in the UK could reassert themselves and favor a higher EUR/GBP.

“Faced with this possibility, we would expect the recent positive impact on GBP from position adjustment to run out of steam. We see risk of a move to EUR/GBP 0.89 towards year end.”

EUR/GBP Outlook Summary