EURGBP has made a sharp reversal technically from the 0.83 levels & is currently trading at 0.8390 levels. There is bullish MACD signal too along with momentum indicators. Fundamentally GBP is losing it’s charm of attractive valuation due to high service inflation & slowing growth characteristics. The current uptick in UK gilts at a 23-year high is not going to go away immediately. Most of the problem in the UK is domestic: the resilience of wage growth, service sector prices, and fears the new Labour government’s tax and spending measures could stoke inflation. In summary, suddenly UK assets are not looking cheap, they are looking over valued in terms of growth opportunities. Hence the major fall in GBP as well as the rapid rise in UK gilts. But instead of outright short GBP, we are recommending long EURGBP as we believe relatively Eurozone looks a better house than UK now considering BOE is constrained from cuts to preserve growth where as ECB is firmly on it’s way to 125 bps more cut in CY25 because it’s inflation profile is far well behaved. Fiscally also Eurozone looks better than UK because interest costs in Eurozone are well behaved as ECB was well in time to cut rates by 100 bps in CY24.
