Pound Sterling Can Recoup Some Euro Losses

Above: File image of Bank of England Chief Economist Huw Pill. © Sérgio Garcia/Your Image for ECB.

Pound Sterling's recent fall has been deemed "excessive" by some analysts who look for a steady recovery over the near-term.

"GBP has succumbed to a cyclical unwind which looks excessive," says Kamal Sharma, an analyst at Bank of America, who expects the easiest path of recovery to be against the likes of the Euro.

The British Pound fell sharply following comments from members of the Bank of England that inflation looks on course to undershoot the Bank's expectations, which analysts said was a potential signpost from the Bank that it was readying to cut interest rates.

However, subsequent strong PMI data for April and the intervention of the Bank of England's Chief Economist injected a dose of caution into the debate, and the Pound has recovered from recent lows against the Euro, Dollar, and other G10 currencies.

"BOE speakers Haskel and Pill sounded cautious on rate cuts after Ramsden’s dovish comments last week," says Saxo Bank. "GBPUSD rushed back above 1.24 to trade around 1.2450."

Bank of America says UK interest are only likely to be cut in August and recent comments from Governor Andrew Bailey and Deputy Governor Dave Ramsden should be interpreted as "incremental steps" towards rate cuts, as opposed to a concerted effort to bring forward rate cut expectations.

Bank of England Chief Economist Huw Pill's comments made on Tuesday suggested there was no material change in the outlook for UK interest rates, which backs an interpretation that the Bank is not ready to cut rates as soon as June.

"That the UK rates market has reacted by less than GBP is testament to the belief that the Bailey comments are out of sync with the prevailing macro narrative," says Sharma.

Above: GBP/EUR is trying to climb back into its comfort zone.

"With GBP undershooting the move in UK rates and more balanced commentary this week, our bias would be to fade the decent dovishness and for GBP to retrace some of its losses," he adds.

Sharma says the Pound has a better chance of advancing against low-yielding currencies, such as the Euro.

Francesco Pesole, FX Strategist at ING, thinks in a similar vein, saying the recent fall in the Pound to Euro exchange rate "might have happened a bit too early".

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He maintains the exchange rate can go above 1.1630 in the short term "as markets hold greater dovish conviction on the ECB than the BoE." (Our view is that a move back into the 2024 range is likely over the coming weeks).

Ultimately, beyond the short run, any significant downside potential for Pound-Euro would only be unlocked by the Bank of England cutting more aggressively than the market currently prices in, argues Pesole.

This might not happen in 2024 according to analysts at ABN AMRO, who expect the Bank of England to cut by less (total of 50bp) than the Fed (total of 75bp) and the ECB (total of 125bp) in 2024.

"We are more dovish than the market concerning these central banks, especially for the ECB. In the near term we expect the dollar to perform well across the board but for sterling to be resilient. We expect Sterling to outperform the Euro in the coming months and to outperform the Dollar later in the year," says Georgette Boele, Senior FX Strategist at ABN AMRO.