Pound-to-Euro Week Ahead Forecast: Starmer Weakened by Key Resignation

🎯 GBP/EUR year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. 📩 Request your copy.

Pound sterling falls in Monday trade as UK politics stays front of mind.

The pound to euro pair fell from an open of 1.1516 to 1.1484, having scaled a four-month high of 1.16 just last week.

The currency was carried to that level by the momentum of the positive post-budget relief rally and survey data showing the economy was picking up genuine momentum in the new year.

However, a combination of renewed political risks and a 'dovish' steer from the Bank of England on Thursday turn the pound's outlook on its head and we're no longer constructive of the near-term outlook.

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On Sunday, those political risks evolved as Morgan McSweeney resigned as Chief of Staff for the office of the Prime Minister, citing the damaging Mandelson-Epstein affair. The move is designed to protect Prime Minister Keir Starmer.

Yet, recent history shows such resignations tend to buy limited time and political commentators see Starmer as vulnerable.

Policy could now tack leftwards to placate restive Labour Party colleagues. If so, investor nervousness over the UK's public debt sustainability will grow, pressuring the pound.

Pound sterling's selloff deepened on Thursday after the Bank of England's decision to leave interest rates unchanged, but surprised traders with a series of signals that indicate a cut is likely in March.

In fact, markets on Thursday raised the odds of the March cut being followed by an additional 25 basis point cut, a reassessment that has weighed on sterling.

Technicals have also deteriorated: the 100 pip drop through Wednesday and Thursday took the pair back below the 200-day exponential moving average (EMA).

The previous Monday's break above this technical level was a signal that the pair's post-November rally had entered a new phase of strength.

How rapidly fortunes change; here we are a week later and the technical outlook has markedly deteriorated.

Optimists will still clutch onto the hope that the uptrend will remain intact as we are still above the lower-bound trendline of the post-November rally (see chart).

However, we have to consider the broader deterioration in sentiment and technical momentum, all of which have deteriorated.

For this reason, our week ahead forecast favours downside and looks for 1.1550 to be in play this week as rallies prove relatively short-lived.

🎯 GBP/EUR year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. 📩 Request your copy.