Synopsis:

Credit Agricole recommends selling EUR/GBP on rallies, citing the GBP's transformation into a higher-yielding, safe haven proxy relative to the EUR. They anticipate continued GBP outperformance in 2025 due to political and economic stability in the UK compared to the Eurozone.

Key Points:

• GBP's New Role:

  • The GBP is increasingly viewed as a higher-yielding, safe haven proxy rather than a higher-beta alternative to the EUR.
  • This shift is reflected in the widening gap between UK and French 5Y Sovereign CDS spreads, which shows increased investor preference for the GBP during both risk-on and risk-off periods.

• Drivers of GBP Outperformance:

  • Political Stability: The UK is expected to maintain political stability, while political risks could rise in the Eurozone.
  • Economic Resilience:
    • The UK economy is less vulnerable to potential new US tariffs, which could weigh more heavily on the Eurozone in 2025.
    • UK domestic demand has been more responsive to recent BoE easing, supporting the economy.
  • Monetary Policy Expectations: Market expectations suggest the BoE will need a less aggressive easing cycle than the ECB to sustain growth, lending additional support to the GBP.

Conclusion:

Credit Agricole identifies selling EUR/GBP on rallies as a top trade for 2025. The GBP’s newfound status as a higher-yielding safe haven, coupled with the UK's relative political and economic stability, sets the stage for continued outperformance against the EUR.