Case remains for sterling to outperform euro
Nov 18 (Reuters) -Despite a modest bounce in EUR/GBP from the recent lows at 0.8262, the case remains for sterling to outperform the euro. As such, rebounds in the cross are likely to be short-lived and instead provide bears with an opportunity to reload at better levels for an eventual test of 0.82.
One key reason for this view is that the ECB is taking a more urgent approach to cutting interest rates, while the BoE has continued to signal that reductions will come gradually. Not only has the ECB stepped up the pace, having delivered back-to-back rate cuts in September and October, but there is a risk that policymakers opt for a larger 50bp cut at the December meeting.
Unlike the ECB, which is now increasingly concerned with the growth outlook, BoE officials remain predominantly focused on inflation persistence, namely services CPI at 4.9% and significantly above the pre-Covid level of 2.5% (2019 average).
Looking ahead, it is a big data week for the UK with CPI, retail sales and PMIs on the docket. Services CPI will be the focus, which the BoE forecasts at 5%. With little priced for the December meeting – 2.4bps – it would take a drop to 4.6-4.7% – a rate the BoE does not project until year-end – to move the needle for BoE pricing and by extension prompt a bigger rebound in EUR/GBP.
The key focus for euro traders will be flash PMIs where a notable deterioration would increase the risk of a larger cut and thus likely see EUR/GBP back below 0.83. For the German figures, the drop in the ZEW survey raises the risk of weaker PMI print. Since 2022, a fall in the ZEW survey has coincided with a softer PMI print 59% of the time.
For more click on FXBUZ
UK services CPI vs BoE fc https://tmsnrt.rs/4evX8Et
EURGBP daily chart https://tmsnrt.rs/3UY7O7Q
Justin McQueen is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond
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