The Pound to Euro (GBP/EUR) exchange rate is trading around 1.1515, having been held in relatively narrow ranges despite sharp moves across wider FX markets.
BNP Paribas remains wary over Sterling fundamentals and expects that a further decline in net yield support will trigger Pound losses this year with GBP/EUR sliding to 1.0870 by the end of this year.
BNP expects that the Bank of England will cut rates again in March with a further move next year which will take rates down to 3.00%. In contrast, it expects no further rate cuts by the ECB with the bank looking to tighten monetary policy next year, eroding the Pound’s yield support.
The bank is also concerned over the underlying political situation with a particular focus on local elections with the risk that instability will trigger fresh concerns over the UK fiscal position.
The bank is also concerned over the underlying balance of payments position which maintains the dependency on net capital inflows.
Overall, it does not expect that UK funds will increase their allocation to UK assets with a preference for international holdings which will maintain Pound vulnerability.
