Tight UK fiscal policy should keep EUR/GBP depreciation moderate

The GBP strength likely reflects the removal of a significant portion of UK political uncertainty just as euro area political risks have intensified. Although UK economic growth should remain higher than that of the euro area, underpinning gradual EURGBP depreciation, tight fiscal policy suggests the pace will be relatively moderate.

"Recent UK labour market data have been encouraging, but Q1 activity data were poor and annual UK GDP growth in 2015 and 2016 is forecasted at 2.2% and 2.1%, respectively", says Barclays. 

Looking ahead, low inflation, tight fiscal policy and institutional risks suggest that the pace of GBP outperformance versus the EUR will be moderate. 

"Furthermore, monetary policy is likely to be more accommodative and BoE rate hike is expected in Q1 16, versus market pricing of May 2016, and the subsequent pace of tightening is expected to be 25bp every six months instead of 25bp per quarter", added Barclays.