The Euro to Pound (EUR/GBP) exchange rate has strengthened to around 0.87, supported by recent political uncertainty surrounding the UK outlook.
Crédit Agricole nevertheless considers that euro gains could prove difficult to sustain if upcoming Eurozone economic data continues to underperform.
The bank argues that both EUR/USD and EUR/GBP are trading above levels implied by relative growth and real-rate fundamentals.
In particular, it expects Eurozone PMI surveys to remain weaker than equivalent UK readings, which could undermine confidence in the single currency.
Crédit Agricole also notes that markets may be underestimating the resilience of the UK economy relative to continental Europe despite recent political concerns.
As a result, the bank sees scope for EUR/GBP gains to reverse if incoming activity indicators confirm a widening growth gap.
The outlook would improve for the euro if Eurozone data surprises to the upside, but for now Crédit Agricole believes risks remain skewed towards renewed Sterling support.
