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French fiscal and political stress leaves sterling less exposed to a Budget sell-off, says Rabobank.
Rabobank has lowered its euro-to-pound forecasts across the board, lifting its outlook for the pound against the euro, as France's fiscal and political troubles outweigh the risks facing the UK ahead of the 28 October Budget.
The Dutch bank now sees the pound holding its recent gains against the euro over the coming months, with the balance of risks tilted in sterling's favour.
"France's political and fiscal issues are arguably in a more difficult position currently than those of the UK. This has allowed EUR/GBP to push lower ahead of the October 28 UK budget and should cap upside potential for the currency pair," says a currency note from Rabobank, published on 5 October.
A lower euro-to-pound rate is a higher pound-to-euro rate, and a capped euro-to-pound rate puts a floor under the pound's recent gains.
Rabobank cites three French pressures: a record debt issuance requirement, a contested 2027 budget and rising poll numbers for the National Rally ahead of next spring's presidential election.
"Chancellor Healey faces a difficult task on October 28 but the situation on the other side of the Channel suggests that GBP is less vulnerable to a sell off vs. the EUR than it would be otherwise," says Rabobank.
The Revised Forecasts
Today, the pound-to-euro rate is at 1.1793, equivalent to 0.8480 in euro-to-pound terms, having hit a one-year high this week.
"Last week we revised our EUR/GBP forecasts lower across the board. We see EUR/GBP trading in a choppy range around current levels on a 1 to 3 month view," says Rabobank.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistRabobank's revised forecast for EUR/GBP:
• Three months: 0.85, equivalent to 1.1765 in pound-to-euro terms
The three-month target sits just beneath spot in pound-to-euro terms, which says the pound has already reached the level Rabobank expects it to hold, leaving limited room for further gains on this forecast but little room for a reversal either.
The bank expects the euro to remain on the back foot more broadly, and has also cut its three-month euro-to-dollar target to 1.13 from 1.16 on widening French bond spreads.
Budget Risk Is Already in the Price
Rabobank does not dismiss the UK's own risks, noting that the Chancellor's fiscal headroom has eroded and the labour market has loosened.
"Since a relatively high proportion of UK government's is held by foreign investors, who tend to be more reactive to 'poor' news, GBP can be particularly sensitive to UK budget concerns," says Rabobank.
The bank argues much of that worry has already been absorbed.
"That said, a lot of these worries are already in the price. CFTC positioning data suggests that speculators have been short of GBP for some time," says Rabobank.
A market already positioned short of the pound has less selling left to do if the Budget passes without incident.
That is consistent with our in-house modelling, which holds that the pound stays capped into the Budget and recovers in its wake, provided it is a non-event.
Where Other Houses Stand
Rabobank sits among the more constructive houses on the pound, though forecasts are split.
ING looks for the euro-to-pound rate to fall to 0.84 over a one-week horizon, equivalent to 1.1905 in pound-to-euro terms, while CIBC targets 0.845, equivalent to 1.1834.
At the other end, UniCredit expects the euro-to-pound rate to "reapproach 0.89-0.90" on a six-month view, equivalent to 1.1111-1.1236 in pound-to-euro terms.
"We remain moderately bearish on the GBP. We expect the BoE to remain prudent on rates, in order not to weigh on the already battered UK economy," says UniCredit.
Nomura forecasts 0.91 on a 12-month horizon, equivalent to 1.0989, and MUFG 0.875, equivalent to 1.1429, with both expecting the euro to recover once French stress eases.
Crédit Agricole CIB sees 0.86 in three months, equivalent to 1.1628.
The split comes down to time horizon: the houses nearest to spot see French stress dominating the coming weeks, while the more bearish 6-12 month forecasts assume it fades.
The Budget on 28 October and the ECB's decision a day later are the next tests, with Rabobank's 1.1765 the level its forecast says the pound-to-euro rate should hold through them.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
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