GBP/EUR: Pressured pound consolidating at lows – Lloyds Bank

Gajan Mahadevan, Quantitative Strategist at Lloyds Bank, notes that over the past month, the pound has softened against the euro, briefly touching a new year-to-date low below 1.12 with key drivers of the pair including data divergence, monetary policy dynamics, and political developments.

Key Quotes

“On the data front, as has been the case for much of the year, European economic data continue to suggest resilience in the euro area economy. Meanwhile, recent economic data in the UK have taken a distinct turn for the worse. With regard to monetary policy, following the Bank of England (BoE) meeting in June, Monetary Policy Committee (MPC) members have generally struck a less ‘dovish’ tone. At the same time, the European Central Bank (ECB) has shifted the focus of its forward guidance away from further easing, removing the reference to “lower” rates. These developments suggest the outlook for monetary policy, both in the UK and in Europe, are less one-sided than the market previously thought.”

“In addition, political developments, particularly around ongoing Brexit negotiations are also considered important by the market. Finally, the German and Italian elections will also be carefully watched. Overall, we favour GBP/EUR to remain range bound, ending the year at 1.14. However, the high degree uncertainty clouding the pair is well reflected in general market sentiment – analysts continue to show significant divergence in their expectations (end2017 - LBCB: 1.14, high: 1.27, low: 1.00).”