According to ING’s Chris Turner, the British Pound (Sterling) experienced a significant downside breakout in the EUR/GBP pair last week, a move attributed to the unwinding of stale sterling shorts and a decline in FX volatility, which reduced the incentive to pay a 2% per annum carry for shorting sterling in a static market environment [1]. Turner notes that this mindset is likely to persist in the near term, suggesting continued support for Sterling in the immediate future [1].
However, Turner warns that UK politics could become a market driver later in July. He highlights the possibility that Makerfield MP Andy Burnham could become Prime Minister on 20 July, with Energy Secretary Ed Miliband as the favorite for the chancellor position. Miliband is described as standing further to the left and is reportedly being encouraged by the party to avoid the incrementalism seen during the Starmer/Reeves years [1].
Despite these potential political changes, Turner points out that there is very little fiscal room for adjustment without raising taxes. Additionally, ING does not expect the Bank of England to raise rates this year. These factors could lead to Sterling giving back some of its recent gains, especially as political developments come into focus later in the month [1].
Turner also notes that market participants should watch whether EUR/GBP support at 0.8545 can hold before politics returns to play a significant role in market movements [1].
CONCLUSION
Sterling's recent gains against the Euro have been supported by technical and market positioning factors, but upcoming UK political developments and limited fiscal flexibility could challenge this trend. ING suggests that without rate hikes or fiscal expansion, Sterling may face renewed pressure later in July.