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11 Mar 2015
EUR/GBP: Yields, not politics at play - Rabobank
FXStreet (Guatemala) - Jane Foley, Senior Currency Strategist at Rabobank explained that at the start of this year there was plenty of speculation in the market that the forthcoming UK May general election could have a negative impact on the value of sterling, at least in the early part of Q2.
Key Quotes:
"After all opinion polls have been suggesting that neither of the 2 main parties has enough support to claim a clear victory."
"There has been talk of king-makers and even of a grand, (albeit unlikely) coalition."
"Against this backdrop the odds of political uncertainty in the UK are high."
"As it stood on January 1 the market consensus was suggesting that EUR/GBP could finish Q2 2015 at 0.78 unchanged from the levels that it started the year. The consensus for the end of Q2 has now dropped to 0.74."
"Although the consensus has adjusted lower it is clearly not doing a good job at keeping pace with the rapid moves in the spot rate; we admit that there are clear downside risks to our own 3 mth forecast of 0.72."
"While the pace of the move in EUR/GBP this year has been dictated by the plummeting EUR, it is still fair to say that UK politics has not been a significant driver of sterling. We offer one simple explanation for this – yield."
"2 year UK bond yields at 0.56% are currently 49bps above Portuguese and 19bps above their Bulgarian equivalent. The impact of the ECB’s asset purchases plan has had a huge impact in depressing the yields of Eurozone countries and, in order to defend themselves against accepting exported deflationary pressures from the Eurozone, central banks such as the DNB and the SNB have also taken aggressive action to keep rates low."
Key Quotes:
"After all opinion polls have been suggesting that neither of the 2 main parties has enough support to claim a clear victory."
"There has been talk of king-makers and even of a grand, (albeit unlikely) coalition."
"Against this backdrop the odds of political uncertainty in the UK are high."
"As it stood on January 1 the market consensus was suggesting that EUR/GBP could finish Q2 2015 at 0.78 unchanged from the levels that it started the year. The consensus for the end of Q2 has now dropped to 0.74."
"Although the consensus has adjusted lower it is clearly not doing a good job at keeping pace with the rapid moves in the spot rate; we admit that there are clear downside risks to our own 3 mth forecast of 0.72."
"While the pace of the move in EUR/GBP this year has been dictated by the plummeting EUR, it is still fair to say that UK politics has not been a significant driver of sterling. We offer one simple explanation for this – yield."
"2 year UK bond yields at 0.56% are currently 49bps above Portuguese and 19bps above their Bulgarian equivalent. The impact of the ECB’s asset purchases plan has had a huge impact in depressing the yields of Eurozone countries and, in order to defend themselves against accepting exported deflationary pressures from the Eurozone, central banks such as the DNB and the SNB have also taken aggressive action to keep rates low."