Economists at Nomura expect EUR/GBP to advance nicely toward 0.88 and possibly 0.90 by the end of the year.
UK CPI could surprise on the downside in the second half of the year
The markets have shifted away from trading based on rate spreads, which would suggest a strengthening of the GBP, and are now more focused on growth expectations. Global surveys have been disappointing recently, leading to the underperformance of high-beta currencies.
The market is currently pricing in 121 bps of BoE policy rate hikes by the end of the year, which contrasts with our forecast of 75 bps.
Our leading indicators suggest that the UK CPI could surprise on the downside in the second half of the year.
Taking into account the overpriced rate hikes and the possibility of a downside surprise in UK CPI, we believe that EUR/GBP is likely to gradually move higher, reaching levels around 0.88 or even 0.90 by the end of the year.