EUR/GBP: 0.8500 area will be major support – ING

The UK headlines today will centre on the UK entering a technical recession. Economists at ING analyze Pound Sterling’s (GBP) outlook following UK Gross Domestic Product (GDP) data.

GDP data not quite as bad as it looks

The data is not quite as bad as it looks and the low -0.3% quarter-on-quarter decline in the fourth quarter of last year is largely down to revisions in October and November, while December actually surprised on the upside. With the UK services PMI recently heading higher, first quarter GDP for this year should be better. Understandably there will be a lot of focus on the January retail sales data on Friday after the sharp 3.2% MoM drop in December.

However, it is fair to say that the Bank of England (and Sterling) are less driven by this activity data than they are by the price data. These should be on the turn lower now and we stick by our baseline view that this 0.8500 area in EUR/GBP will be major support and that a slightly more aggressive easing cycle from the BoE than the European Central Bank will take EUR/GBP a little higher later this year. 

We should also keep an eye on the gilt market. There is a hint again that the UK government is committed to tax cuts but struggling to find funding. Any gilt underperformance could weigh on Sterling too.

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