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The pound’s slip against the euro says more about the dollar than it does about anything happening in the UK.
Pound sterling starts the new month a shade softer against the euro as Friday’s dollar surge unwinds, but with the euro reclaiming its ground against the dollar faster than the pound, confirming cross-currency dynamics are centred on the dollar.
The pound-to-dollar exchange rate at 1.3537 and the euro-to-dollar is at 1.16082. The divergence between those two dollar legs accounts for a softer pound-to-euro exchange rate at 1.1666.
Given short-term dynamics, further dollar weakness from here would underpin GBP/USD but could weigh on GBP/EUR.
Stepping away from the shorter-term trends, pound sterling arrives at the start of September in robust shape, having pushed to fresh one-year highs against the euro during August and having held the bulk of a constructive summer against the dollar.
Near-term, cross-currency dynamics will remain instructive; on the basis of recent price action, further USD strength would obviously weigh on GBP/USD but could offer support against the likes of GBP/EUR.
“Near-term cyclical considerations are more supportive for the Dollar. US growth remains steady, the Q2 earnings season should mitigate immediate concerns around the AI trade, and any renewed tick up in geopolitical tensions and/or energy prices is likely to refocus attention on the risks to Europe, especially as we enter crunch time for gas storage,” says Kamakshya Trivedi, FX strategist at Goldman Sachs.
Above: GBP/EUR near-term ranges are being squeezed.
Barclays says the ‘dollar premium’, the discount investors require to hold dollars, continues to hover close to extremes of 5.5%, and a reduction in that premium should support USD.
That premium is “associated with reversals in the past. Along with increasingly negative dollar sentiment, this implies a high bar for further dollar weakness,” says a weekly FX note from the bank.
The read-across is that today’s recovery in GBP/USD is unlikely to extend far on dollar softness alone, which leaves the pound leg to do the work.
“The pound held steady in August as activity resilience, a small upside miss in the July core inflation and higher energy prices (including a higher Ofgem cap for Q4) prevented follow-through from the dovish lean of the August MPC meeting,” says Barclays.
The market remains priced for 25bp by December and 50bp by April, a pricing Barclays notes sits awkwardly alongside a relatively high bar for swing voters Clare Lombardelli and Governor Andrew Bailey to move on Bank Rate.
The Bank Consensus, Without the Terminal
The median, mean, highest and lowest from the October survey update, plus named point forecasts out to 2027.
~70 Banks surveyed 10 Named forecasts 4 Quarters ahead
Free information pack, issued by World Wide Currencies.
“That said, energy price pressures could well sustain the market’s hawkishness for a while,” says the bank.
“Fiscal risks are also likely to resurface at some point, though probably closer to the October Budget,” it adds, echoing the tax headlines that have been building against the pound since late August.
“This makes positioning the main downside risk for the pound in the near term, in our view, with hedge funds the longest they have been in over a year according to the CFTC database,” says Barclays.
The institutional consensus amongst investment bank forecasters meanwhile expects both GBP/EUR and GBP/USD to settle lower by year-end, a gap set out bank by bank in the newly released quarterly consensus forecast document, which is now available.
For now, GBP/EUR is defending the 1.1670 pivot that framed the pair through August, while GBP/USD’s hold above 1.35 rests on Friday’s dollar bid staying where the fix left it.
The Bank Consensus, Without the Terminal
The median, mean, highest and lowest from the October survey update, plus named point forecasts out to 2027.
~70 Banks surveyed 10 Named forecasts 4 Quarters ahead
Free information pack, issued by World Wide Currencies.
