Pound Faces Fiscal and BoE Risks, Says Rabobank Strategist

Rabobank's Senior FX Strategist Jane Foley believes that the British Pound (GBP) is vulnerable to policy risks. The UK Chancellor, Healey, has been emphasizing pro-growth rhetoric and committing to fiscal rules, but this has left questions over funding. As a result, the EUR/GBP currency pair remains range-bound.

Foley points out that the gilts market is particularly sensitive to negative budget-related news due to its high foreign ownership. This means that overseas buyers can react quickly to souring news flow, potentially impacting the Pound negatively. In contrast, worrisome news on the French budget has seen sellers move into other Eurozone bond markets with little impact on the EUR.

This positioning may leave the Pound vulnerable to a hawkish or dovish takeaway from the Bank of England (BoE) meeting next week. The market is already pricing in a hawkish outcome, so anything that can be construed as dovish could cause the Pound to slip. Based on this factor, coupled with the Pound's potential sensitivity to fiscal matters, EUR/GBP is expected to drift higher towards 0.87 over three months.