Sterling’s Recent Strength Against Euro May Be Short-Lived

Key Moments

ING on the EUR/GBP Breakout

ING strategist Chris Turner notes that EUR/GBP has recently broken lower in a move he describes as substantial and deserving of attention. He attributes much of the shift to investors unwinding outdated, or “stale,” short positions in Sterling, as well as to a changing risk-reward profile in foreign exchange markets.

With foreign exchange volatility dropping over the summer period, Turner highlights that investors have been reluctant to continue paying approximately 2% per year in carry costs to stay short GBP, particularly if currency pairs are expected to trade in relatively narrow ranges. In his view, this logic is likely to remain intact in the very near term, limiting challenges to Sterling’s current position for now.

Political Risk Set to Re-emerge

Turner cautions that the current calm may not last, as domestic political developments in the United Kingdom are expected to move back into focus later in July. He points to the possibility that Makerfield MP Andy Burnham could become Prime Minister on 20 July and then move quickly to appoint a new chancellor.

According to Turner, “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.” Political positioning within the potential new administration, and any departure from prior policy approaches, are seen as potential catalysts for renewed market scrutiny of UK assets and Sterling.

Limited Fiscal Flexibility and Monetary Policy Outlook

Turner underscores that the UK’s fiscal backdrop leaves little room for major policy shifts without raising taxes. He describes the “problem” as a scarcity of fiscal space for meaningful adjustments absent higher tax revenues.

In addition, Turner reiterates ING’s expectation that the Bank of England will not deliver any interest rate increases this year. The combination of constrained fiscal options and a steady policy rate path is seen as a possible headwind for Sterling, increasing the risk that the currency could reverse part of its latest advance against the euro.

Key Level to Watch in EUR/GBP

Turning to technical considerations, Turner identifies a specific support area in the EUR/GBP pair as an important reference point for market participants. “Let’s see if EUR/GBP support at 0.8545 can hold before politics returns to play a role in markets later this month,” he says, suggesting that this level could be pivotal as political risk events approach.