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The Pound to Euro exchange rate has unraveled all of its second quarter gains but Goldman Sachs says the trend is still higher and that Bank of England interest rate policy can only weigh on the pair for so long.

Sterling has fallen almost two percent against the euro, slicing through its 50 and 100-day moving averages and multiple other supports on the charts, as the speculative market cut back its largest net long position.

The market’s net long swelled to a record size in July, leaving sterling vulnerable to sharp adjustments like that playing out since last Thursday’s interest rate cut from the Bank of England.

The central bank has cast itself in a dovish light by easing policy at the same time as its forecasts pointed to a pickup in economic growth and imminent rebound in inflation, according to the Goldman Sachs team.

“Taken in isolation, that is the type of monetary policy reaction function that weighs on a currency,” Goldman Sachs strategists wrote in a recent research briefing.

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of November uptrend and selected moving averages indicating prospective areas of support.

GBP/EUR has fallen as the market priced in a deeper easing cycle from the Bank of England after it cut Bank Rate in early August, prompting profit-taking in Sterling, which was recently the market’s largest long position.

Widespread losses for global equity markets and a sharp unwinding of popular carry trades have also likely weighed on GBP/EUR of late, which appeared to be stabilising above the 1.16 handle on Tuesday.

The Goldman Sachs team says the Bank of England’s relatively dovish stance on the interest rate outlook can only weigh on the pair for so long, meanwhile, and that the broader trend remains to the upside.

“It will not be a dovish outlier for long,” they said of the Bank of England in a note to clients late on Friday, while reiterating a forecast for EUR/GBP to fall to 0.82 over the next year [GBP/EUR to rise to 1.2195].

“We therefore think the trend in EUR/GBP is still lower, but the recent disruption is understandable when viewed through this lens, and in the context of turbulent risk markets,” they added.

Above: Bank Rate implied by December 2024 SONIA futures contract.