Sterling should remain under pressure in the near term as rising energy prices, supply constraints and post-Brexit tensions dampen the U.K.’s economic outlook, MUFG Bank says. Noting a jump in U.K. natural gas futures, MUFG analyst Derek Halpenny says the Bank of England is likely to look beyond rising price pressures and refrain from raising interest rates in a “very fragile economic environment.” Government policy in response to the U.K.’s fuel crisis resulting from a shortage of drivers will also cloud the outlook, while Brexit risks will rise after U.K. Brexit minister David Frost said the government is moving toward suspending parts of the Northern Ireland protocol, he says.
The pound stands out among the crowd as a currency with real reasons to move noisily – and to keep on moving too. Economists at Credit Suisse expect noise to continue for weeks to come even if EUR/GBP eventually drifts towards their 0.8450 targets.
Taking a pounding:
“On the GBP-positive side, there are ongoing signs of UK labor market shortages and corresponding upward wage pressure. On the other hand, these highly publicized shortages have reminded markets that the UK could pay a growth price for high input costs and supply-chain difficulties. The net result of these contrary forces could be many months of push and pull, lots of ‘gamma’ but with the EUR/GBP cross ultimately not moving especially far from where we are now.”
“Our base case target of EUR/GBP 0.8450 is probably closer to ‘heaven’ (hopes for BoE rate hikes allow for persistent rate support) than ‘hell’ (EUR/GBP explodes to 0.9000 where it started 2021 due to the negatives discussed above dominating). But we acknowledge that GBP now needs a solid risk premium, and we have given up on Q3 expectations for a move to EUR/GBP 0.8300.”
EUR/GBP Short (Sell)
Enter at: 0.84964