Rabobank’s Senior FX Strategist Jane Foley notes that the Pound has been the second best performing G10 currency after the Dollar since the Middle East conflict, driven by a sharp repricing of Bank of England (BoE) policy expectations. Rabobank economist Stefan Koopman now sees risk of only one BoE hike, potentially in April, and the bank expects EUR/GBP to move toward 0.87–0.88 over 3–6 months as UK growth and stagflation risks weigh on Sterling.

Sterling strength seen fading versus Euro

"After the USD, the pound is the second best performing G10 currency since the start of the war in the Middle East. This reflects the sharp turnaround in expectations regarding BoE policy. Ahead of the conflict, the market was comfortable with the forecast that the BoE could cut rates twice more this year."

"Currently, the market is priced for between two to three rate hikes on a one year view, though tightening expectations have fallen back a little today. This is unsurprising. In Rabo’s view, three rate hikes appears excessive."

"Given risk that this may shift the Labour party further to the left, this is also potentially unnerving for both gilts and the pound. We look for GBP to slip back vs. the EUR into the spring."

"It follows that it may be more vulnerable to recession risks than many of its peers, particularly if the BoE were to unleash an aggressive round of policy tightening. Against this backdrop, we expect the pound to give back some of its recent gains vs. a basket of (non-USD) G10 currencies into the spring."

"Against this backdrop, we expect the pound to give back some of its recent gains vs. a basket of (non-USD) G10 currencies into the spring. We expect EUR/GBP to trade in the 0.87 to 0.88 area on a 3-to-6-month view."

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