Image © Adobe Images
Nomura strategists cut GBP/EUR target as selloff intensifies.
The Pound to Euro exchange rate (GBP/EUR) dipped noticeably in the run-up to the U.S. stock market open on Friday amidst an ongoing deterioration in UK fundamentals.
GBP/EUR reached 1.1460, putting it firmly below the 1.15 support line, which brings the 1.14 target into contention for the coming days.
"Underperformance is weighing on GBP/EUR," says George Vessey, Lead FX & Macro Strategist at Convera. "The pound has now declined in seven of the past nine weeks, shedding roughly 3.5% as markets increasingly price in a more dovish BoE stance relative to the ECB."
The Pound has now fallen for four weeks in succession and is close to the low that followed the significant selloff that followed Donald Trump's April 01 'liberation day' tariff announcements.
Back then, the fall was more of a panicked knee-jerk response to headlines, but the July selloff is rooted in solid fundamentals, which means the chances of a let-up in selling pressure are slim.
Target Cut
Economists at Nomura, the global investment bank, were surprised by how 'hawkish' the ECB sounded, and as a result, think the Euro can climb further than previously thought against the Pound.
On Friday they lower their Pound-Euro target, judging the ECB showed a willingness to look through potential near-term inflation undershoots, suggesting that rates would now remain unchanged at 2%.
Nomura's strategists have been buyers of the Euro against the Pound since early June, on ongoing monetary policy divergence and fiscal issues, "but the scale of the change in tone was surprising," says Nomura FX Strategist Dominic Bunning.
"With market pricing still implying close to one further cut this cycle, there should be more rates driven upside for the EUR. As a follow up to this we raise our target to 0.8975 – aligned with the highs seen in early 2023," he adds.
EUR/GBP at 0.8975 gives a GBP/EUR of 1.1140.
Central Bank Policy Divergence Grows in Potency
On the one hand, the Euro is finding broad support and was most recently bolstered by Thursday's European Central Bank (ECB) policy update that showed it unlikely that much more by way of further interest rate cuts was likely.
By contrast, markets see more cuts coming from the Bank of England owing to a slew of downside data surprises that confirm the UK economy is struggling to find the positive growth momentum that was expected at the start of the year.
"With the eurozone showing signs of resilience and the ECB nearing the end of its easing cycle, the policy divergence could keep pressure on the currency pair through the summer," says Vessey.
Above: GBP/EUR under renewed pressure on Friday.
Analysts at MUFG bank says the ECB event helped lift bond yields in Europe and provided a notable divergence with the UK where yields headed in the opposite direction.
UK yields were pressured after the UK PMI composite reading for July fell back to 51, while the Eurozone's rose to 51. That both equalled at 51 tells half the story: momentum is clearly improving in Europe and deteriorating in the UK.
Indeed, the PMI measure of UK employment showed a notable deterioration and should ensure the steady deterioration in the labour market continues, which will convince the Bank of England that it needs to cut interest rates further.
"The direction of conventional monetary policy remains towards loosening," says a note from Lloyds Bank out Friday. "Bank Rate cuts are expected to occur in August and November, and finally in April next year as Bank Rate reaches its long-run level of 3.50%.
These fundamentals favour ongoing Pound Sterling downside and GBP/EUR has fallen in seven of the last nine weeks, and the tactical approach taken by traders is to buy Euro (EUR/GBP) on any weakness, behaviour we are seeing on Friday.
"Having already witnessed EUR/GBP take out 0.8700 we look set to extend towards the year to date high at 0.8738 and above there 0.8768 from November 2023, says Jeremy Stretch, lead international FX strategist at CIBC Capital Markets.
EUR/GBP at 0.8768 translates into a GBP/EUR forecast target of 1.14.
We reported on Wednesday that a new technical analysis from Lloyds Bank finds that 1.14 is doable in the current GBP/EUR selloff cycle.
Analyst Nick Kennedy at Lloyds says he likes to "maintain longs" on EUR/GBP, targetting a move to 1.1444 first and then the December 2023 low at 1.14.