ING warns sterling gains driven by short-covering and low volatility could fade as UK politics return later this month with limited fiscal headroom.
The British pound extended gains against the euro last week, breaking below key support levels in EUR/GBP. Analysts attribute the move to stale sterling short positions and reduced appetite for paying carry amid lower FX volatility, with traders avoiding the 2% annual cost of shorting sterling in static markets. This trend may persist in the near term, but political developments could disrupt it.
UK politics are set to re-enter focus later in July, with potential leadership changes and fiscal policy shifts. Limited fiscal space and no expected Bank of England rate hikes this year could pressure sterling, prompting a reversal of recent gains. Support at 0.8545 in EUR/GBP will be a key level to watch as markets assess the new government’s economic direction.
ING highlights the risk of sterling giving back some gains if fiscal constraints and political uncertainty weigh on sentiment. The absence of monetary tightening further reduces support for the currency.