Rabobank Sees Further EUR/GBP Gains Amid UK Budget Uncertainty

The EUR/GBP exchange rate has been recovering from its July low near 0.8455, and analysts at Rabobank are predicting further gains as the summer draws to a close.

Rabobank notes that the Pound is now the third-worst performing G10 currency over one month, ahead of only the Swiss Franc and US Dollar, which may be due in part to pared-back expectations regarding Bank of England rate hikes.

The unresolved issue for the UK government is how it intends to pay for its growth plans, with some news regarding the forthcoming budget already seeping out, potentially creating friction for the gilts market and GBP into the autumn.

Rabobank warns that greater Gilt issuance would imply greater pressure on gilts prices and the Pound, while also highlighting a second downside risk for Sterling in the form of monetary policy. The bank believes markets continue to overestimate the likelihood of another Bank of England rate hike this year, particularly if energy prices ease as geopolitical tensions cool.

Rabobank is targeting a break above 0.8588 and expects a repricing towards unchanged Bank Rate, combined with pre-Budget nervousness, to put the Pound under pressure, favouring buying EUR/GBP on dips to the 0.8550 area.