ING said sterling could weaken against both the euro and the US dollar as the Bank of England is expected to avoid tightening this year, leaving markets to price only modest moves. The firm pointed to 21bp of tightening implied for the September meeting, while citing corporate inflation-expectations data as reducing perceived risks of second-round inflation effects.
With the European Central Bank positioned more hawkishly and broader sentiment in equities described as fragile, ING flagged scope for the cross to move higher. It sees EUR/GBP drifting back towards 0.8680, and expects GBP/USD to test 1.3300, with an outside risk of 1.3200 if risk appetite deteriorates further.
Bank Of England Policy Stance And Market Implications
It looks as though the Bank of England will try to avoid further tightening for the remainder of the year. The latest UK CPI reading for May came in below expectations at 2.8%, giving the BoE confidence that second-round inflation effects are contained. This policy caution is likely to weigh on the Pound’s outlook.
In contrast, we note the European Central Bank is signaling a more hawkish path, with recent Eurozone inflation surprising to the upside at 3.1%. The US Federal Reserve also remains firm after the May jobs report showed a robust 210,000 positions added. This growing policy divergence between a hesitant BoE and more determined peers is a key driver for our view.
Sterling Vulnerability, Risk Sentiment, And Trading Strategies
Sterling is also vulnerable because it’s seen as a pro-risk currency, which tends to underperform when investor sentiment sours. The VIX index, a key fear gauge, has crept up to 19.5, suggesting markets are bracing for volatility. This environment typically sees capital flow away from the Pound and towards perceived safe-havens like the US Dollar.
Given the hawkish ECB and the fragile equity backdrop, we favour EUR/GBP making a move back towards the 0.8680 level in the coming weeks. Historically, policy divergence of this nature has supported the cross-rate. Traders could look at call options to position for this potential upside.
For GBP/USD, we see a clear path to test the 1.3300 support level as dollar strength persists. In a more pronounced risk-off scenario, an outside risk to 1.3200 is certainly possible. Positioning for further downside through put options or selling futures contracts seems like a prudent strategy for the weeks ahead.
