ING’s Chris Turner reports that EUR/GBP has broken below the 0.8600/8610 support, triggering liquidation of expensive, stale Sterling shorts, especially among asset managers. He flags UK political risks later in July and into November, constrained by fiscal limits, and expects the Bank of England’s (BoE) dovish Monetary Policy Committee (MPC) members to seek renewed easing. Turner sees the EUR/GBP move likely capped near 0.8545/50.

EUR/GBP breakout and UK risks

"EUR/GBP finally broke below big support at 0.8600/8610 yesterday. There was no particular catalyst, but probably the slightly softer euro and the proximity to big support levels triggered some unwinding of stale sterling short positions."

"There is probably also the view that UK politics may not come back to weigh on sterling until the end of this month or in August. Andy Burnham will probably take over as Labour's leader and UK PM on 20 July. The focus will then be on whether he appoints Ed Miliband as Chancellor (probably a little sterling negative) and then what policies are planned to be enacted in Burnham's first budget – probably in early November."

"New policy ideas could start to emerge in August. As Keir Starmer found, the UK fiscal straitjacket very much limits room for manoeuvre, and it is hard to see any major spending plans coming through without tax rises."

"Overall, this current EUR/GBP breakout may temporarily run to the 0.8545/50 area – but that could well be the extent of the move."

"At the same time, it is expensive to be short sterling, where one-week rates are around 3.80%, and with volatility falling we are probably seeing some position liquidation."

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