EUR/GBP: Four reasons to expect a stronger pound – Credit Suisse

With the EUR/GBP 0.8350 target reached, economists at Credit Suisse choose now to shift their target still lower to 0.8275, around the lows of 2020 and levels not materially breached since July 2016. 

The prospect of a supportive BoE

“Although the BoE arguably did not handle well its hike messaging in Q4 of last year, as of now it has established itself as a pack leader when it comes to openness to monetary tightening, not least because it was prepared to act during peak omicron fears. With 10yr UK inflation breakevens again near 4%, the market is sending a clear message that more needs to be done for inflation expectations to be brought under control.” 

The backdrop of markets still short GBP

“In terms of positioning, IMM data point to a continued large GBP short position in the market. The consistency of this backdrop has been a source of encouragement for our GBP-positive stance throughout our bullish phase over much of the last 12 months.” 

Risk reversal skews still priced for GBP puts

“Although GBP implied volatility has tumbled of late, risk reversal skews remain well bid for GBP puts, suggesting there is still risk aversion that can be priced out in relation to the currency.”

More benign Brexit political outlook

“As far as Brexit / Northern Ireland Protocol negotiations go, we suspect the departure of hardliner Lord Frost as the key UK negotiator and his replacement by Foreign Secretary Truss could herald a more conciliatory stance by PM Johnson. Simply put, a disastrous election in May could be the beginning of the end for Johnson, raising the pressure on him to move the country forward economically rather than leaving it mired in persistent uncertainty and never-ending battles with the EU. For us, this lowers the risk to GBP from the political angle and helps our bullish stance.”