EUR/GBP goes down faster than it goes up, but goes nowhere

The pound bounced after Brexit Minister Dominic Raab said he was hopeful of a deal with the EU on the terms of the UK's departure by 21 November.

Tuesday morning The Times carried a report that ‘Theresa May seals Brexit deal on financial services' and gave the currency a further boost ahead of the Bank of England’s Monetary Policy Committee (MPC) meeting which maintained interest rates. 

According Kit Juckes, Head of FX at Société Générale, the movement highlights the fact that the pound reacts faster and more to good than bad news. 

In a note to the French investment bank’s clients, Juckes wrote: “I'm not sure it tells us a great deal about the longer-term outlook. A chart of EUR/GBP and relative yields shows the two have now only the weakest of relationships, but the chart does show that EUR/GBP falls faster than it rises, though for the year as a whole, it has fallen from 0.888 to 0.882, averaging 0.8840, which captures the idea that it is ‘bumping along the bottom'. 

“GBP/USD has been trending lower since the spring, in synch with the downtrend in EUR/USD, and has bounced off the year's low at 1.2660 as EUR/USD has bounced off 1.13, though the pound has bounced with considerably more vigour. EUR/GBP goes down faster than it goes up, but goes nowhere.”

Given the tight labour market in the UK, and somewhat elevated global price pressures, there is probably more upward pressure on UK inflation than Eurozone inflation in the short-term. 

“If the UK does get a ‘soft Brexit' deal, rates are likely to rise in London well before they do in Frankfurt. That can help GBP, albeit only in the context of continued bumping along the bottom of its range,” Juckes concluded.