Pound a Sell against Euro this Week says RBC

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Pound Sterling is tipped to fall against the Euro over the coming days by strategists at RBC Capital Markets in their latest "Trade of the Week" recommendation.

The call comes amidst signs of growing unease in UK debt markets, with government bond yields of all tenors starting to shoot higher once more.

"GBP's flat performance has to be seen against a background of 2yr yields moving 70bp in the UK’s favour, relative to both the US and Europe, so there has clearly been a rise in the risk premium carried by GBP assets," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

UK government bond yields surged in the wake of Chancellor Kwasi Kwarteng's mini-budget as investors considered whether the UK government's borrowing was affordable in a world of rising interest rates.

Above: GBP/EUR (top) and EUR/GBP (bottom) with take-profit targets included. To better time your payment requirements, consider setting a free FX rate alert here.

The rising bond yields coincided with a fall in the Pound, suggesting investors are increasingly nervous with respect to owning UK assets.

But the Bank of England put a lid on the volatility when it intervened and said it would buy long-dated bonds to bring down their yield and with it the cost of borrowing across the economy.

The Bank's emergency bond-buying programme is however set to end on Friday and markets appear increasingly nervous about another bond market stress event.

The Bank of England's monetary policy stance is also seen as another potential source of Pound Sterling weakness over the coming days according to RBC Capital Markets as they eye a line-up of speeches from various Monetary Policy Committee (MPC) members.

"Current pricing implies close to 100bp of hikes at each of the next three MPC meetings," says Cole.

"While this seems fair for the November 3 meeting, we doubt this week’s deluge of BoE speakers will endorse the longer-term pricing and GBP is vulnerable to a repricing of nominal rate expectations as well as a widening of risk premia around the end of BoE gilt market support," he adds.

Above: The yield paid on UK government bonds is rising again.

The speakers due this week are John Cunliffe (Tuesday), Governor Andrew Bailey (also Tuesday), James Haskel (Wednesday), Chief Economist Huw Pill (Wednesday) and Catherine Mann (Wednesday and Thursday).

"Five of the MPC's nine members are scheduled to speak this week. EUR/GBP is uncorrelated to general risk appetite - a desirable property given the volatility in equities and the imminent start of the Q3 earnings season," says Cole.

RBC Capital goes 'long' EUR/GBP from 0.8771, targeting 0.91.

This translates into a Pound to Euro target of 1.0990. (If you are looking to secure your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

RBC says last week's Trade of the Week netted a 0.9% gain.