Rabobank's Senior FX Strategist Jane Foley notes that the British Pound (GBP) has demonstrated notable resilience, ranking as the second-best performing G10 currency in the month to date and fourth for the year overall. This strength is attributed to persistent UK inflation, expectations regarding Bank of England (BoE) interest rates, and inbound mergers and acquisitions flows supporting the currency [1].
However, Foley cautions that the GBP's positive momentum faces significant headwinds. She highlights excess economic capacity, high government debt, and political uncertainty surrounding Burnham’s incoming Labour government and its fiscal stance as potential factors that could weigh on the pound. Foley states, 'Despite this month’s better tone, we don’t see GBP as being free of political risk,' and suggests that while Burnham may initially benefit from a honeymoon period, the tightness of UK public finances will likely increase pressure on his leadership [1].
Rabobank anticipates that the market may re-price in favor of steady BoE interest rates for the remainder of the year, contrary to some expectations for a rate hike. Foley argues that this scenario could undermine the pound, especially if there is a downward adjustment in short-dated interest rates. The next BoE policy meeting is scheduled for July 30, which will be closely watched for policy signals [1].
Looking ahead, Rabobank forecasts that EUR/GBP could edge up to the 0.87 area by the end of the year, reflecting a weaker outlook for the pound as political and fiscal risks come to the fore [1].
CONCLUSION
While the British Pound has shown resilience in 2024, Rabobank warns that political and fiscal risks tied to the incoming Labour government could undermine its strength. The bank expects steady BoE rates and sees potential for EUR/GBP to rise to 0.87 by year-end, signaling a cautious outlook for the pound.