Prepare Now for Pound-to-Euro Weakness: Soc Gen

Image © Adobe Images

Pound sterling to weaken against the euro says Société Générale.

FX strategists at Société Générale tell clients that positioning for further pound weakness can yield value.

Their expectation is that the pound will come under further pressure as the UK navigates a difficult economic and financial trajectory.

"The UK faces a very sterling-unfriendly fiscal/monetary policy mix, with further fiscal tightening likely at November’s Budget and rate cuts set to follow. The Government feels the need to establish fiscal credibility but has struggled to control spending, making tax increases inevitable," says a note from the FX strategy team dated September 16.

The call comes as the pound edges higher against the euro, with the pound to euro conversion testing the mid-1.15's over the course of the past week, having been as low as 1.1413 in late July. (EUR/GBP down from 0.8760 into the 0.8650s).

Numerous analysts we follow think some of the recent GBP resilience seen of late is down to the UK's elevated short-term bond yields, which offer higher returns to those in the Eurozone.

In a low volatility environment, and with focus on the UK's fiscal concerns fading somewhat, the focus on UK bond yields tends to support flows into GBP.

However, Soc Gen says this yield advantage should wane in the future as there is greater scope for the Bank of England to cut interest rates further than the European Central Bank. If so, UK bond yields will fall and the advantage over Eurozone equivalents will diminish.

"EUR/GBP is now moving in line with its short rates differential, and our new Global Economic Outlook expects the ECB to have completed 80–90% of its easing cycle, while the BoE has only completed 50–60%. The probability of a BoE cut in November is now close to 50–50, leaving room for near-term GBP downside," says Soc Gen.

Soc Gen's FX analysts expect Sterling to be "the most vulnerable European currency." House forecasts show EUR/GBP gradually moving towards 0.90. (GBP/EUR down to 1.11).

Those with money transfer payments over the coming weeks should consider the implications of this prediction and consider locking in current rates to cover a portion of their exposure.