Rabobank's Senior FX Strategist Jane Foley discusses the British Pound's (GBP) strong performance, noting GBP is the second-best G10 currency over three months despite no Bank of England (BoE) hikes. The team highlights market optimism around incoming UK Prime Minister Burnham and his likely right-leaning Chancellor choice, but stresses fiscal constraints and political scepticism. They expect EUR/GBP to rise toward 0.87 over a 3‑month horizon.

Pound resilience faces political tests

"On a 3-month view the pound is the second best performing G10 currency after the USD. This is despite domestic political change in the UK and the fact that the BoE, unlike five other G10 central banks, has not hiked interest rates this year. There has been a tightening of UK market rates relative to the start of the Iran war, although rate hike expectations have dropped noticeably back from their peak."

"GBP’s resilient tone suggests that the market may be willing to give PM-in- waiting-Burnham the benefit of a honeymoon period. This morning’s press reports that he may be erring towards choosing a Chancellor from the right of the Labour party rather than the left, strengthens the potential that both the gilts market and GBP will breathe a sigh of relief. That said, it is still unclear how Burnham intends to fund his agenda."

"We remain sceptical of the ability of GBP to extend its current resilient tone beyond the summer and look for EUR/GBP to push higher towards 0.87 on a 3-month view."

"This factor coupled with Rabo Research’s house view that BoE rates will remain on hold this year, suggests scope for a move higher in EUR/GBP on a 3-month view."

"For certain, the market will be watching news on fiscal issues closely in view of the clear budgetary constraints in the UK. For this reason, Burnham’s choice of Chancellor will be a big test. While UK asset markets will be relieved if his Chancellor is not from the left of the party, it may be tough for the new PM to maintain any honeymoon period into the autumn."

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