Synopsis:

RBC maintains a bearish outlook on EUR/GBP, expecting GBP to continue its relative outperformance over the coming months. Supportive factors include a more hawkish BoE rate profile compared to the ECB, lower UK vulnerability to US tariff risks, and market positioning favoring GBP strength.

Key Points:

1. Recent GBP Performance: GBP has been the third-best performer in G10 since September, though with choppy trading. EUR/GBP hit YTD lows post-US election, underscoring GBP’s outperformance.

2. BoE’s Policy and Rate Outlook:

   • The BoE’s November rate cut (-25bps) reflected progress on disinflation, with an 8-1 vote.
   • The central bank remains cautious about the impact of fiscal expansion from the UK’s October Budget, which slowed the government deficit reduction.
   • RBC’s UK team expects consecutive BoE rate cuts until May 2025, with the terminal rate at 3.75%. However, fiscal developments tilt risks toward fewer cuts, aligning UK rates higher than those in the Euro area.

3. External Factors and Positioning:

   • The UK is less exposed than the Eurozone to potential tariff risks from the Trump administration.
   • The market remains positioned short EUR/GBP, leaving room for GBP to strengthen further.

Conclusion:

RBC favors short EUR/GBP over the next 1-3 months as GBP continues to benefit from relatively higher UK rates, reduced vulnerability to external risks, and strong market positioning. While GBP remains susceptible to volatility, the broader outlook supports its outperformance against EUR.