Yesterday witnessed a brief surge in EUR/GBP to 0.8650, a movement that appears correlated with the concurrent sell-off in UK gilts. According to ING FX analyst Chris Turner, the underperformance of UK gilts relative to US Treasuries is particularly noteworthy and potentially concerning for the UK’s Debt Management Office (DMO).
The analyst suggests that the DMO’s current issuance of £300 billion in new debt this year may already be approaching its limit. A further deceleration in the UK economy, leading to reduced revenues and increased welfare expenditure, could exert additional downward pressure on gilt prices. Consequently, the gilt market represents a significant vulnerability for the British pound.
Current market pricing reflects expectations of approximately three interest rate cuts by the Bank of England this year, a forecast with which ING concurs. However, a swift return of EUR/GBP below 0.8500 is viewed with some reservation, given the potential for bond market volatility in response to a potentially high US Consumer Price Index (CPI) reading. Should ING’s EUR/USD outlook materialize, GBP/USD may encounter buying interest near the 1.2800 level.
