Rabobank's Senior FX Strategist Jane Foley highlights that the British Pound (GBP) has been a strong G10 performer this year, supported by sticky United Kingdom (UK) inflation, Bank of England (BoE) rate expectations and inbound M&A flows. However, Foley warns that excess economic capacity, high government debt and political uncertainty around Burnham’s incoming Labour government and fiscal stance could weigh on GBP, with EUR/GBP seen higher by year-end.

Feel good for now

"The pound is the second best performing G10 currency in the month to date after the NOK. In the year to date the pound is fourth place in the G10 performance table. The UK’s recent history of sticky inflation and the swing in short-term interest rates at the start of the Iran war to pricing in BoE rate hikes can partly explain GBP’s resilience."

"Despite this month’s better tone, we don’t see GBP as being free of political risk. While Burnham could be granted a honeymoon period, the tightness of UK public finances indicates that pressures on his premiership will inevitably mount. We also see risk that the market will re-price in favour of steady interest rates from the BoE this year which could weigh on the pound."

"Even if Burnham keeps gilts onside in the months ahead, we see risk for a downward adjustment in short-dated interest rates. Counter to market expectations for a rate hike, it is RaboResearch’s view that steady BoE rates will prevail through to the end of the year, which should undermine GBP. The next BoE policy meeting is scheduled for July 30, this will be gleaned for policy hints."

"We continue to see risk that EUR/GBP will edge up to the 0.87 area by the end of the year."

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