Sterling Suffers as UK Politics Weighs on Pound

Rabobank's Senior FX Strategist Jane Foley believes that the British Pound (GBP) is facing pressure against the Euro (EUR), particularly in the coming autumn. According to Foley, this weakness is linked to reduced expectations of Bank of England (BoE) tightening and recent political developments under UK Prime Minister Burnham.

The GBP staged a rally against the EUR from late June into early July, but then reversed course at the start of last month, with the EUR/GBP currency pair trading sideways in recent sessions. Foley notes that the UK parliament is now in recess until September, which means sparse newsflow. However, some information about the forthcoming budget has been leaking out and this may cause friction for both the gilts market and GBP in the autumn.

Rabobank's research suggests that markets are overestimating the risk of BoE rate hikes, particularly by the end of the year. Foley prefers buying EUR/GBP on dips to the 0.8550 area, targeting higher levels above the recent high at 0.8588. A break in this region could increase upside potential for EUR/GBP.