EUR/GBP surges on weaker sterling to fresh highs

The pound falls across the board on Friday. The EUR/GBP pair is having best day since March 2020 on the collapsing sterling.

After a brief pullback, the EUR/GBP pair resumed the upside and hit levels above 0.8900 for the first time since 2020. So far, the cross peaked at 0.8910. It is hovering around 0.8900, up 170 pips for the day, the best performance since March 2020. A sharp decline of the pound and risk aversion are driving the move.

Higher interest rates do not seem to be in favour of GBP and provide no significant help to the sterling. On Thursday the Bank of England raised the key interest rate by half a percentage point to 2.25%. The UK government announced on Friday a massive tax cut package. The measures offered no real support for the pound. Also, UK government bonds are collapsing on Friday.

The implication is that a deteriorating budget deficit, and a persistently and likely continued deterioration in the current account will weigh negatively on the sterling. In such an environment, rising rates and favourable interest rate differentials are not supportive for GBP at this time.

With risk sentiment and the global growth expectations worsening, the market may need to consider how the move to parity for GBP/USD may be. Meanwhile, the Euro looks better situated, for now, versus GBP. The move above 0.88 sets the stage for a higher new range bound by 0.90/0.92.

The EUR/GBP is about to post the eighth weekly gains in a row. Initially, it was a hawkish European Central Bank and now is a weaker pound that is driving the cross to the upside. The weekly close is set to be the highest since January 2020. The 0.8900/10 area is a strong resistance and a consolidation above could point to more gains even amid overbought conditions. No signs of stabilization or correction are seen at the moment.