GBP: Sterling gains advantage due to positioning – ING

Sterling Outshines Euro Despite Dollar Strength

According to Chris Turner from ING, the British Pound has managed to outperform the Euro even as the US Dollar remains robust. The EUR/GBP pair experienced a significant decline recently, which Turner links to overextended market positions and a scaling back of expectations for interest rate cuts by the Bank of England. ING’s UK economist now anticipates the next BoE rate reduction will occur in April, with a total of two cuts this year. This outlook is expected to keep EUR/GBP trading above 0.88, though it also leaves the Pound vulnerable if bond markets face renewed stress.

Key Factors Behind Sterling’s Strength

• Market Positioning: Asset managers have maintained substantial net short positions on the Pound, while holding long positions on the Euro. This imbalance contributed to Sterling’s recent gains, particularly during a broad market deleveraging earlier in the week.
• Interest Rate Expectations: The market’s shift away from expecting imminent Bank of England rate cuts has also provided support for the Pound.

James Smith, ING’s UK economist, has revised his forecast for the next BoE rate cut, now expecting it in April instead of March. He still projects two rate reductions this year, which should keep EUR/GBP above the 0.88 level.

Risks Ahead for Sterling

Despite recent strength, the Pound could face challenges if bond markets come under renewed pressure. A possible scenario involves elevated energy prices halting or reversing monetary easing, with populist governments potentially reinstating energy subsidies, which could negatively impact bond markets. A similar situation led to the gilt market turmoil in 2022.

This article was produced with assistance from an AI tool and reviewed by an editor.