The Pound to Euro (GBP/EUR) exchange rate has continued to demonstrate resilience and is trading at 6-week highs near 1.16 with markets pricing in three UK rate hikes this year..
Rabobank expects near-term political Pound vulnerability with economic considerations dragging the currency down over the medium term. It forecasts a slide to 1.1240 on a 12-month view.
On a near-term view, Rabobank expects political considerations will undermine the Pound.
It notes that betting markets are indicating an 80% chance that Prime Minister Starmer will be replaced as Prime Minister this year and a very bad set of local election results would increase pressure.
The bank is concerned that a new leader would trigger a shift in fiscal policy which would increase the risk of a further sell-off in the UK bond market and put downward pressure on the Pound.
As far as interest rates are concerned, Rabobank expects that the Bank of England (BoE) will raise interest rates by 25 basis points at the June meeting.
It does not, however, expects further rate hikes, contrary to market expectations, and considers that the BoE will sanction renewed cuts to 3.50% on a 12-month view.
In contrast, the investment bank now expects the ECB will sanction two rate hikes.
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