Can sterling and swissie both head lower?

Bank of England dissents: meh – it’s about the structural backdrop
Sterling jumped higher on yesterday’s BoE meeting that saw a surprisingly split vote of 5-4 as  the MPC held an unprecedented second vote to ensure the results because an initial three-way split (one wanted a 50-bp reduction) meant no decision could be announced. This is nominally hawkish as short UK rates backed on doubts that further BoE cuts will be in the offing this year (November BoE meeting priced at 50/50 now). Bailey noted uncertainty on inflation and admitted that the bank’s QT programme was causing strain at the long end of the UK gilt curve, but no specific guidance was available on what decision will be made in the review of the pace of QT. The knee-jerk rally in sterling does nothing to change the structural weaknesses in the UK economy and dynamics for sterling, which may quickly revert to its weakening trend from here. A quick erasure of yesterday’s rally would be the best path for the EURGBP bulls, but yesterday’s meeting could take more time to digest, especially if geopolitics weigh on euro in the coming week or more (Trump-Putin summit – what will it produce?).

Swiss franc – signs of resistance after Trump tariffs. And now tariffs on gold?
The Swiss franc has seen one of its more notable moves lower against the euro since early March, when the single currency was surging across the board on anticipation of the massive incoming German fiscal stimulus. The enthusiasm for that stimulus has since faded on signs of a very slow rollout. The latest EURCHF surge is driven by the suddenly very high relative tariff wall of 39% that Trump has imposed on Swiss imports. A good friend of mine touted some  very valid likely reasons for the US singling out Switzerland – the fact that it is “neutral” in defense alliance terms, but gets to enjoy the NATO security umbrella in some respects. But as well, there is the angle that Swiss pharmaceuticals are far and away the largest single category of exports into the US and Trump is on the warpath on drug prices, whether from a populist angle or because these are also in the sphere of “national security” for key drugs that are not produced in the US. Third, the Swiss National Bank has been a massive accumulator of US stocks, something it has earned a fortune on and this could be a kind of “you’re welcome” tariff. Finally, the FT is even reporting that gold bullion could be tariffed as well, which would shut down any gold flows to the US. Could EURCHF have bottomed out for the cycle on this reassessment and head back toward parity, or is that too ambitious?

Chart: EURGBP
EURGBP sold off heavily on the BoE meeting yesterday, not anticipating the scale of hawkish dissent to the rate cut decision and boosting sterling from a rate-spread angle. But the structural pressures on sterling remain and could continue to pressure sterling from here. One wild card for the euro is how a Trump-Putin summit and any lasting ceasefire in Ukraine would play for the single currency. Would this be supportive from a “less tension and uncertainty” angle or negative from a “less urgency on fiscal” angle? A quick rally and close back above 0.8700 would have the bulls back in business, otherwise, any sell-off needs to be corralled ahead of the 0.8600+ range lows to keep the trend intact in the short term.