Despite the strong recovery in the UK economy, we note that very littlehas been reflected in the EUR/GBP cross. This has led to a strongoutperformance of German government bonds when compared to their UK equivalents, particularly in the 2 year maturity, as can be seen in thechart (blue line = Germany – UK 2 year yield spread, source: Bloomberg).This brings back the debate about dis-inflationary forces in the Eurozoneand the impact on the Euro, which should equate to a gradualstrengthening, as long as the periphery remains in deflation. We thusquestion whether the out performance of the UK economy is now largelypriced in and that the larger trend for this pair may well be up, asdiscussed for other Euro crosses in recent weekly research pieces. We arealways keen observers of price action and when price moves are so mutedgiven such strong economic out performance, we are inclined to thinkthat the trend is still biased to the upside.
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MIG Bank