EUR/GBP to move downward over 2022 as central banks and politics favour sterling – ING

Economists at ING doubt the noise regarding the unravelling of EU-UK trade negotiations has to hit GBP as hard as it did in 2019. Hence, they expect EUR/GBP spikes to be capped as the 0.8560/8700 area.

ECB-BoE divergence

“We doubt EUR/GBP has to spike 5-7 big figures on any substantial deterioration in cross-channel relations. Based on how GBP has traded so far this year, we believe Brexit fatigue can keep the risk premium more to the 1-2% region. 0.8650/8700 could then remain at the top of the EUR/GBP trading range.”

“Despite market pricing to the contrary, an ECB hike looks highly unlikely next. In the UK, we are faced with the intriguing prospect of the BoE allowing its Gilt holdings to roll off once the policy rate hits 0.50%. The improvement in relative government bond yields should favour GBP.”

“President Macron looks comfortably ahead in the polls at present with around 25% of the vote, though plenty can change over the next six months. In the UK, the Johnson government seems to survive most missteps and the opposition Labour party are yet to mount a serious challenge. And we suspect Chancellor Rishi Sunak is keeping his powder dry for a pre-election tax give-away potentially in early 2023.  Arguably, therefore, political risks are greater for the eurozone in 2022.”