- UK seeks closer alignment with EU
- Analyst says this is GBP supportive
- Sees further GBP/EUR upside as a result
Picture by Simon Dawson / No 10 Downing Street
Pound Sterling is set to benefit from the UK's strengthening ties with the EU under Prime Minister Keir Starmer, say analysts.
A summit between the UK and EU is to be held on May 19, and the European Council says that under discussion will be defence, internal security, criminal matters, sanitary and phytosanitary matters, emissions trading systems, migration and youth mobility.
The breadth of the summit points to a new type of accord between the UK and EU, which foreign exchange analysts say is supportive of the domestic economy and the Pound's outlook.
"An improved UK/EU trade agreement on 19 May could favour lower EUR/GBP," says Kit Juckes, head of FX research at Société Générale.
The Pound to Euro exchange rate (GBP/EUR) has been climbing steadily (EUR/GBP falling) since it struck a low of 1.1440 on April 11, with gains also being attributed to a cooling in global trade tensions as U.S. President Donald Trump steps back from his maximalist positions on tariffs.
However, more and more analysts we follow are pointing to a reset in UK and EU relations as a driver for GBP/EUR buoyancy.
"EUR/GBP has corrected 2.5% from its 11 April peak. This is both a consequence of safe-haven long EUR positions being lifted and some idiosyncratic sterling strength. The latter seems to be related to expectations of an improvement in UK-EU relations," says Francescol Pesole, FX Strategist at ING Bank.
Nick Thomas-Symonds, the UK's European relations minister, has confirmed publicly for the first time that Britain is looking at setting up a youth mobility scheme as part of a new "strategic partnership".
It is believed that this will help unpack a wide-ranging package of economic reforms that economists at ING think can boost economic growth.
"We also note that the gradual post-Brexit rapprochement between the UK and the EU continues and could, over time, alleviate some of the negative consequences for the former, in a boost to the GBP. All this should keep EUR/GBP under pressure, in our view," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
ING's UK Economist James Smith says the British government is prioritising a reset in EU economic relations, with the aim of convincing the Office for Budget Responsibility to upgrade its medium-term growth forecasts and unlocking more fiscal headroom.
Owing to the UK's fiscal rules, Chancellor Rachel Reeves could be forced to raise taxes and cut spending again in the Autumn as spending continues to grow, borrowing costs increase (watch the 10-year UK bond yield), and tax revenues disappoint.
But, if the OBR upgrades its growth profiles owing to an EU-UK reset, then she will be told she has enough 'space' to avoid taking unpopular decisions.
"Closer regulatory alignment may emerge over the coming months. Though the economic impact may not be huge, positive headlines over the coming weeks might prompt a bit of a hawkish repricing of Bank of England expectations," says Pesole.
ING estimates the near-term fair value for the Pound to Euro is currently 1.1876.
Picture by Simon Dawson / No 10 Downing Street
Foreign exchange analysts at Barclays are constructive on the Pound in the medium term, having long been of the belief that an EU-UK Brexit reset was on the cards under a Labour government.
"There is also positive news on the trade front, both in relation to the trade deal with the US announced last week and the EU-UK summit on the 'Brexit reset," says Barclays in a regular weekly note.
"These developments afford reasons for further convergence towards levels more consistent with rate differentials and VIX (c. 0.83-0.84 in EURGBP)," add analysts. "We retain our bullish GBP view."
EUR/GBP at 0.83-0.84 equates to GBP/EUR at 1.2050-1.19.