Market pricing implies about 80bp of Bank of England tightening by year-end, close to European Central Bank pricing. The ECB policy rate starts 150bp lower than the BoE rate.<\/p>\n
The BoE decision may lead to softer rate expectations and could support EUR\/GBP. An 8-1 vote split is expected in favour of holding rates, with Chief Economist Huw Pill voting for a rise.<\/p>\n
No new guidance on future policy is expected from the BoE. Possible alternatives include Megan Greene and Catherine Mann also voting for a rise, or Governor Andrew Bailey pushing back against aggressive market pricing.<\/p>\n
UK politics is also affecting sterling, with recent remarks attributed to Labour\u2019s Manchester mayor Andy Burnham linked to moves in gilts and GBP. The comments included a suggestion that defence spending could be exempt from the fiscal rule.<\/p>\n
EUR\/GBP is described as having upside risks tied to concerns over government stability and potential Labour underperformance. A move above 0.8700 is mentioned for the near term.<\/p>\n
We believe the market is pricing in too much tightening from the Bank of England, putting it nearly on par with the European Central Bank. This seems excessive, especially since the BoE’s policy rate at 4.25% is already much higher than the ECB’s 3.00%. We see a strong chance that market expectations will be adjusted downwards following the Bank’s meeting today.<\/p>\n
This potential for a dovish repricing in the UK contrasts with the ECB, which may maintain a firmer tone. Recent data supports this, with UK inflation cooling to 2.8% last month, whereas Eurozone inflation remains stickier at 3.2%. This divergence suggests a path higher for the EUR\/GBP exchange rate.<\/p>\n
For derivative traders, this points towards positioning for a stronger euro relative to the pound. Strategies like buying EUR\/GBP call options with strikes around 0.8700 could prove effective over the next few weeks. This allows traders to benefit from the expected upward move while limiting downside risk.<\/p>\n
Adding to this outlook is the growing political uncertainty in the United Kingdom. The stability of the Labour government is being increasingly questioned, with a YouGov poll last week showing their lead over the opposition has narrowed to just five points. This kind of political instability tends to weaken a currency.<\/p>\n
We have seen how sensitive markets are to UK fiscal policy, especially after the sharp sell-off in gilts and sterling during the 2022 mini-budget crisis. Recent comments from potential leadership challengers about exempting certain spending from fiscal rules are making the bond market nervous again. Any hint of loosening fiscal discipline could put significant pressure on the pound.<\/p>\n
Combining the potential for a more dovish Bank of England with rising political risks, we expect to see a move above 0.8700 for EUR\/GBP in the near term. The current environment presents clear upside risks for the currency pair.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Markets price 80bp BoE tightening; decision may soften expectations, boosting EUR\/GBP amid UK political uncertainty risks.<\/p>\n","protected":false},"author":103,"featured_media":17030,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-49142","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t