Chris Turner at ING notes that despite broad Dollar strength, the Pound has outperformed the Euro, with EUR/GBP dropping sharply during a recent deleveraging phase. He attributes this to stretched positioning and reduced expectations for Bank of England easing. ING’s UK economist now sees the next BoE cut in April, with two cuts in total, keeping EUR/GBP above 0.88 but leaving Sterling exposed to bond market stress.

Positioning and BoE expectations support

"Dollar strength has dominated this week, but sterling has outperformed the euro. The biggest drop in EUR/GBP came on Tuesday during a broad deleveraging phase in the market. We attribute this sterling outperformance to positioning, where asset managers have been (and still are) running large net short sterling positions, while at the same time running long euro positions."

"Equally, the re-pricing at the short end of the interest rate curve as the market prices out Bank of England easing has helped sterling too."

"Our UK economist, James Smith, is pushing back his forecast of the next BoE rate cut to April from March. But he retains two BoE rate cuts this year, which should still mean EUR/GBP trades at 0.88+."

"Additionally, sterling looks poorly placed should bond markets come under pressure again. One scenario here is that high energy prices curtail or reverse monetary easing cycles, populist governments renew energy subsidies and bond markets get hit."

"This was the scenario in 2022 which prompted the gilt crisis later in the year."

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