The Euro-Pound rate falls after stronger UK GDP, but Rabobank sees limited scope for lasting Pound Sterling gains ahead of the October Budget.
Pound Sterling‘s response to stronger UK growth figures faces a test in the coming weeks, with Rabobank arguing that interest-rate expectations leave little room for further sustained gains against the Euro.
The Euro to Pound exchange rate traded around 0.8548, down 0.27%, extending its retreat from Friday’s close near 0.8601.
UK second-quarter GDP growth was revised up to 0.5% from 0.4%, supporting expectations that the Bank of England could raise borrowing costs.
Rabobank nevertheless questions how much more support monetary policy can provide.
“That said, while higher short-term interest rates are a currency positive factor, we see little room for sustainable gains for the pound from this front given that more than 100 bps of policy tightening is priced in on a 12-month view.”
That pricing amounts to more than four quarter-point increases, leaving Sterling exposed if investors scale back their expectations.
“In our view, it is more likely that GBP could soften as rate hike risks are reined in.”
The bank highlights pressure on household spending from energy bills and potential tax increases, alongside a looser labour market that could restrain wage-driven inflation.
The 28 October Budget presents a separate test for Sterling, with fiscal discipline potentially helping confidence even if further tax rises weaken growth.
“If the current Labour party leadership team maintains its promise to respect the former Chancellor’s fiscal rules, there may be room for a post budget relief rally in the pound.”
Rabobank also sees limits to a Euro recovery, citing Eurozone growth headwinds and political uncertainty in France and Germany.
It expects EUR/GBP to hold its recent range in the weeks ahead, while keeping its medium-term Euro forecasts under review.
Our currency coverage draws on live market data, official economic releases and published bank research.
