GBP: To continue to perform well over the coming months – ING

EUR/GBP is closing in on a major support level at 0.82. And were it not for the strong dollar, the Bank of England's trade-weighted sterling index would be pushing to new highs of the year. Two related factors are driving the sterling move, ING’s FX analyst Chris Turner notes.

GBP pays the highest deposit rates in the G10 space

“The first is that a functioning UK government and some mild fiscal stimulus stand in contrast to the current political impasse in continental Europe. This means UK growth will be stronger than the eurozone's next year. And because of that, the Bank of England policy trajectory is being priced much closer to the Fed than the ECB.  This is keeping sterling hedging costs relatively high, where one-year EUR:GBP swap rate differentials remain at 200bp.” 

“Should EUR/GBP break 0.8200, expect to hear many reports of sterling returning to pre-Brexit levels – probably linking that to warming relations between the new UK Labour government and the EU. We think GBP can continue to perform well over the coming months (GBP pays the highest deposit rates in the G10 space), but our main concern is that the BoE turns more dovish in February once services inflation finally delivers another sizable leg lower.”

“For the time being, however, it is all eyes on 0.8200 in EUR/GBP.”