Rabobank Senior FX Strategist Jane Foley discusses EUR/GBP in light of shifting expectations for the European Central Bank (ECB) and Bank of England (BoE). She notes that EUR/GBP has traded with a downside bias recently but sees this fading as spring progresses. With UK growth concerns, political risks and limited BoE tightening, Foley expects EUR/GBP to grind higher towards 0.88 into the autumn.

Rabobank sees downside bias fading

"Since the start of this month, EUR/GBP has been trading in a fairly narrow range, albeit with a downside bias. However, heading further into the spring we see the downside bias as running out of steam and expect the currency pair to turn modestly higher."

"That said, having priced in significant hawkish reactions from most G10 central banks in March, in recent weeks the market has been moderating its collective view regarding the likely reactions of several major central banks including both the ECB and the BoE. The market is still expecting rate hikes from both these central banks on a 1-year view, though less action is now implied by market rates than in March."

"We favour buying dips in EUR/GBP into the May election. We then look for a gradual move higher towards 0.88 into the autumn."

"The downgrade in UK economic prospects adds another challenge for the Labour party headed into the May local elections in England and parliamentary elections in Wales and Scotland. A drubbing for the Labour party does increase the chances of a leadership challenge for the PM Starmer."

"The risk of such an event is likely to keep speculators unwilling to hold long GBP positions into next month. We favour buying dips in EUR/GBP into the May election."

"Given current optimism that the war in the Middle East is coming to an end and optimism that the inflationary impact of the conflict could avoid worst case scenarios, weak UK GDP data could lead to further dampening of BoE rate hike speculation and undermine the value of the pound further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)