Fade EURGBP Bounce
With the absence of breakthroughs or even data in the US, European currencies are now enjoying greater share of the limelight. Draghi’s commentary has allowed the euro to recover significant lost ground, and with UK data starting to look ‘toppish’, some investors may be wondering whether EURGBP is due for a reversal. After all, if the ECB is willing to allow front-end rates to rise and continued balance sheet contraction, policy differentials will struggle to move further in favour of sterling, irrespective of how markets view the credibility of forward guidance. Nonetheless, we believe talk of a structural euro recovery is overdone, along with the notion that UK ‘good news’ is priced in. ECB matters aside, the market is not even close to pricing in the full extent of the UK’s sudden improvement in economic conditions. The policy differentials story is also far more nuanced.
Read the full report: UBS