Last week saw the Pound to Euro (GBP/EUR) exchange rate stall below 1.1500 on Wednesday and retreat to near 1.1460 on Thursday.
The Pound was hurt by a fresh slide in risk appetite as energy prices surged again together with dovish comments from Bank of England (BoE) Governor Bailey. Political pressure for closer ties with Europe may help protect the Pound while the fresh surge in energy prices is also a negative factor for the Euro.
Crucial support for GBP/EUR remains below the 1.1400 level seen in late February. ING is backing a near-term move to 1.1360 while MUFG forecasts that the pair will slide to 1.11 by the first quarter of 2027 amid weak UK fundamentals.
Brent crude is trading over 7.5% on the day amid fears over an escalation in attacks on Iran while there has been further choppy trading surrounding UK rate expectations.
According to ING; “Bank of England Governor Andrew Bailey appeared to deliver a rate protest in an exclusive interview with Reuters yesterday. He emphasised that markets were ‘getting ahead of themselves’ in pricing a series of rate hikes this year.”
It added; “We are in Andrew Bailey’s camp with the view that a growing output gap and weak pricing power mean that there are limited chances of second-round effects from this energy supply shock.”
ING is not convinced the BoE will increase rates at all, but the BoE will still be wary over the jump in costs due to the spike in energy prices.
According to the monthly Decision Maker Panel companies expect to increase prices 3.7% over the next year from 3.4% previously and the highest reading since October.
MUFG still considers that the markets have over-reacted; “The BoE was priced for two rate cuts before the conflict. This swing is unjustified in our view and while this has partially reversed, the OIS pricing at end-March still implied two rate hikes. We see the BoE delivering one, with a risk of two depending on broader market conditions.”
The latest comments on NATO from President Trump have triggered fresh unease over the US relationship with the US and increased pressure for closer ties with Europe, a theme pursued by Prime Minister Starmer..
Rabobank commented; “Starmer used his address to tell his people that Brexit had done deep damage to the British economy, and that Britain now had to draw closer to the EU to strengthen its economic and security relationships in its immediate geography.”
