GBP: Tax hikes to impact expectations for BoE easing

The Pound Sterling (GBP) retains its position as the best performing G10 currency in the year to date, but it has never fully recovered to its pre-Brexit referendum levels vs. the EUR, but there’s scope for cable to head to 1.34 before the end of this year and for EUR/GBP to reach 0.83 on a 6-month view, Rabobank’s FX analyst Jane Foley notes.

GBP can continue its slow burning recovery

“GBP retains its position as the best performing G10 currency in the year to date. It took this mantle from the USD in July, in part due to optimism that the UK could be facing a more stable political backdrop and in part due to the expectations of a September Fed rate cut that started to mount that month.”

“In our view, GBP’s grind higher both this year and last year is a recovery from the weakness it had previously suffered, particularly in late 2022 during the Truss leadership. That said, GBP’s difficulty had pre-dated Truss – the pound has never recovered to its pre-Brexit referendum levels vs. the EUR.”

Looking ahead, we see scope that GBP can continue its slow burning recovery. On the back of a more aggressive pace of Fed easing, we see scope for cable to head to 1.34 before the end of this year and for EUR/GBP to reach 0.83 on a 6-month view. That said, the budget may complicate this outlook. Not only may it sour investor sentiment, but a hefty round of tax hikes could impact market expectations regarding the pace of BoE easing.

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