Pound-to-Euro on Course for 1.11: Soc Gen
- Written by: Gary Howes
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"GBP is losing its rate support," says Société Générale's chief FX analyst Kit Juckes.
In a note out midweek, he opines, "have I missed my chance to sell GBP?"
The assessment follows the release of UK inflation data that undershot consensus expectations by a considerable margin, triggering a sizeable selloff in pound exchange rates.
The ONS said UK inflation was at 3.2% y/y in November, well below the consensus estimate for 3.5% y/y. In the month of November, inflation actually fell 0.2% m/m.
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"This morning’s UK inflation data are, needless to say, a pain in the neck!" he quips.
Juckes' disapproval of the pound's reaction is personal:
"When I came to London to go to university in 1981, my allowance was in French francs. North Sea oil boosted the pound by over 20% in my first year and shrunk my spending power accordingly. Now I earn pounds and spend euros on holiday and my plan is to wait for the weight of short GBP positioning to help me get a better selling level."
The pound's decline in response to the inflation reflects increasing market bets for further interest rate reductions at the Bank of England.
The market entered Wednesday expecting a cut on Thursday and another by April next year.
The odds of a second 2026 cut were at 40%. Following the release, odds have risen to 70%, representing a significant shift.
That in turn pressures UK bond yields - the effective interest rates paid to investors who hold UK debt - have risen.
Interest rate movements, in particular the differential between rates from one country to the next, matter greatly for currency values.
"I can imagine the market pricing rate cuts in March or April, and in June or July, possibly dragging EUR/GBP to 0.90 in the process. That’s not SO far away," says Juckes.
EUR/GBP at 1.11 gives a pound to euro conversion of 1.11.
With EUR/GBP close to 'maxing out', Juckes thinks there's scope for greater decline against the Aussie dollar:
"There's still room to get short GBP/AUD," he says.
With the Bank of England looking to cut on a number of occasions, the contrast with the Reserve Bank of Australia (RBA) is stark. Not only has the RBA signalled it is done cutting, but the market thinks the next move will be a rate hike.
The textbook suggests this divergence in interest rate policy could weigh heavily on GBP/AUD.
