British Pound: Sterling faces fiscal and BoE risks – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses the challenges facing the British Pound, Sterling. Chancellor Healey's pro-growth rhetoric and commitment to fiscal rules have raised questions about funding stability, leaving the EUR/GBP pair range-bound. The Pound's vulnerability stems from high foreign ownership of gilts and market pricing for Bank of England rate hikes, with expectations of EUR/GBP drifting higher towards 0.87 over three months.

While EUR/GBP reached its lowest point when Healey finished his presentation, the currency pair has remained within a range set last Friday. The gilts market can be particularly sensitive to negative budget-related news due to its high foreign ownership, potentially impacting the pound negatively. In contrast, worrisome news on the French budget has not significantly affected the EUR.

This positioning may leave the pound more vulnerable. A hawkish outlook from the Bank of England meeting next week is already priced in, meaning the pound could slip on any dovish signals. Consequently, we anticipate EUR/GBP to be biased higher towards 0.87 on a three-month view.