Nomura’s Global FX Strategy team, including Dominic Bunning and Yusuke Miyairi, has reiterated a long EUR/GBP position, citing a more hawkish policy stance from the European Central Bank (ECB) compared to the Bank of England (BoE) as a key driver for Euro strength against the British Pound [1]. The team notes that recent hawkish announcements from the ECB, as well as the potential for future rate hikes, are expected to be supportive for the Euro, while the Pound is likely to face pressure due to ongoing political and fiscal risks in the UK [1].
Nomura projects that the terminal ECB rate will reach 3.00% versus a BoE rate of 3.50% in 2027, with one rate hike expected this year and two cuts next year for the BoE [1]. They highlight that a narrowing of the two-year rate differential to below 100 basis points from the current 140 basis points would support a move in EUR/GBP towards 0.90 over the coming months [1]. Positioning data is described as mixed, but not presenting significant obstacles to a higher EUR/GBP cross [1].
Political and fiscal uncertainty in the UK is underscored by the upcoming by-election on 18 June, where Andy Burnham is expected to return as an MP and potentially challenge Prime Minister Keir Starmer for leadership [1]. The recent resignation of Defence Secretary John Healey on 11 June is seen as further undermining Starmer and highlighting the UK's tight fiscal backdrop, which Nomura believes will necessitate either spending cuts or tax increases—measures that could further weigh on UK growth [1].
Nomura concludes that clearer signs of monetary policy divergence between the ECB and BoE, combined with UK political-fiscal risks, should ultimately drive EUR/GBP higher, despite the pair's recent lack of significant movement [1].
CONCLUSION
Nomura expects the Euro to outperform the Pound in the coming months, driven by ECB-BoE policy divergence and persistent UK political and fiscal risks. The firm maintains a long EUR/GBP position, targeting a move towards 0.90 as rate differentials narrow and UK uncertainties persist.