The Pound to Euro (GBP/EUR) exchange rate dipped sharply last week on political grounds amid increased pressure on Prime Minister Starmer surrounding the Mandelson affair.
After a limited rebound, the Pound has been damaged this week by weaker than expected labour-market data. GBP/EUR dipped to 8-week lows around 1.1430 before a slight recovery.
Nomura expects further selling pressure on the Pound through economic and political channels and is even more confident in its target of 1.1170.
On political grounds, the bank considers that the Gorton and Denton by-election on February 26th poses important Pound risks if Labour is defeated. A loss would trigger fresh concerns over Starmer’s position, especially as he was instrumental in blocking Burnham from standing in the seat. Internal anger would risk a challenge on the Prime Minister. There would be some relief if Labour manages to secure a victory.
On economic grounds, the bank expects that weaker economic data will lead to a change in dynamics within the Bank of England, especially given evidence of weakness in the labour market. It expects a majority will back a rate cut in March with scope for further cuts over the next few months, undermining yield support for the Pound.
