Cable Near 3-Year Peak, But Struggles vs. Euro

Despite recent gains, the pound shows signs of vulnerability as the UK economy confronts challenges.

Exceptions, But Not in a Favourable Way

Over the past two weeks, Cable has been on an upward streak, with the pound reaching a 7-month high against the dollar earlier this week. However, the pound surge is not attributable to the currency’s strength as much as it is to dollar weakness, as President Donald Trump pushed for Jerome Powell’s removal as the Chair of the FOMC. Yields on US Treasuries have been under pressure as investors seek safe-haven assets, anticipating further easing from the Fed as the economy slows down. The post-election optimism from November has waned, and the reality of tariffs has taken hold.

The UK, with its trade deficit with the US, could benefit from tariffs. However, the country is facing domestic challenges that have led the IMF to recently revise its growth forecast downward to 1.1% from 1.6% previously. Unlike its counterparts in the EU, the British government is reluctant to increase spending, with higher inflation from increased taxes seen as a potential drag on consumer sentiment.

The Divergence in the Currencies

Despite Cable nearing a 3-year high, the pound is falling against the euro, with the EURGBP pair reaching its highest level since November 2023 as traders price in the potential for more rate cuts from the BOE this year. Softer-than-expected inflation figures in March are driving this expectation. While inflation is expected to pop back up in April due to regulated utility price increases, the latest figures were below the 3% level that the BOE expects inflation to remain above for the rest of the year. The tariff disruption could cause companies to send cheaper goods, which are affected by levies in the US, and contribute to lower inflation in Britain in the coming months.

However, consumers are not feeling relieved just yet, which could put further pressure on the pound. Retail sales for March are expected to slow to -0.4% from +1.0% previously. Cable has retreated from its peak after Trump alleviated some of the market's concerns by stating that he would not fire Fed Chair Jerome Powell, with the currency pair's movements suggesting a stronger influence from developments in the US in the current environment, as both the euro and pound have remained relatively in line following the news. Now, the market is counting down to the BOE and Fed meetings, where the American central bank is expected to hold rates while its British counterpart is anticipated to ease again.

EURGBP Wedge Signals Impulsive Reversal

The completion of an ending wedge pattern in the EURGBP down at 0.8245 pair has led to an impulsive reversal, currently in a corrective phase. If the 0.85 level is breached before the formation of a 5-wave leg above the regional peak of 0.8770, this reversal could be invalidated, opening the door to the bottom via 0.8350. On the upside, a move above 0.88 will expose the 0.90 level should bulls manage to reclaim the 0.89 resistance, fully reversing the wedge pattern.

Source: SpreadEx / EURGBP

Key Takeaways

Despite the UK economy facing significant challenges, including a downward growth revision by the IMF, the pound has gained against the buck recently. However, the divergence between cable and the euro reflects expectations of more rate cuts by the BOE due to softer inflation as consumer sentiment remains subdued in the UK. Yet, the currency pair's movements suggest a stronger influence from developments in the US market, with the BOE and Fed's upcoming decisions being closely watched.