In his illustrious career, Robin Brooks has served as the head currency analyst at Goldman Sachs, the chief economist at the Institute of International Finance, and a sort of cult figure in Brazil, where he has expressed optimism about the future of the real.
Brooks, who is currently a senior fellow at the Brookings Institution, recently made a daring statement on social media, calling it “perhaps the biggest macro trade in coming years.”
The euro will reverse its over 20% gain against the British pound (EURGBP) since 1999.
In an interview with MarketWatch, Brooks provided more details on that forecast.
According to him, central banks have been offering “a big assist to fiscal policy and deficit funding” throughout the last ten years. The “whatever it takes” remark given by former European Central Bank President Mario Draghi in 2012 resulted in an IMF-style rescue for heavily indebted member nations.
In order to control bond-market pressure, the ECB then turned to tools like outright monetary transactions and, more recently, the transmission power instrument. Brooks stated that there were “basically no strings attached, no conditionality if the sovereign is deemed to be fiscally sustainable, then the ECB can intervene to bring yields back down,” according to Brooks. The ECB was pushed “more in the direction of capping yields” and toward a fiscal role as a result.
However, in the United Kingdom, particularly during Liz Truss’ brief 2022 premiership, the Bank of England typically “leaves the government to its own devices.” (During the Truss premiership, the Bank of England did interfere in the bond market, but it promptly sold the bonds it had purchased.)
“And so when I talked about this being one of the bigger trends going forward, it’s basically that markets will reward, ultimately, the U.K. for that because you can’t have fiscal, responsible policy, unless the bond market is allowed to send the signal that fiscal policy is on an unsustainable path,” he explained.
Brooks clarifies that he’s “not recommending a trade” instead “highlighting what I think markets care about and a theme which is basically fiscal policy, fiscal consolidation and debt.”
“It is essentially a conclusion that markets will shift to reward central banks that permit yields to rise, and as a result, fiscal policy will be more responsible in some places, in an era where debt has increased significantly following COVID and central banks worldwide have done a great deal to keep yields low. For that, I believe the U.K. is kind of ground zero,” he remarked.
Amid uncertainties surrounding the forthcoming policies of President Donald Trump’s administration, the dollar has truly taken center stage, but the euro has struggled somewhat against the pound since 2023 following a significant surge in 2022.
The dollar will be under significant appreciation pressure due to U.S. tariffs on China or the EU, and as a result, currencies like the euro and sterling are likely to decline. However, that does not preclude an eccentric movement in the euro versus sterling, according to Brooks.
He points out that in recent years, there have been significant macrotrades in the currency arena. In 2024, the reason for the decline of the yen (USDJPY) was “basically about fiscal dominance in Japan and the BOJ [Bank of Japan] having to keep interest rates low because of the high debt burden.” The euro’s decline from $1.40 to nearly parity with the dollar over the previous ten years was another significant macro trade.
When it comes to the euro/sterling macro trade, what should investors keep an eye on? “Clearly, the most crucial factor is how the British government responds to rising interest rates and whether or not steps will be made to reduce debt and the deficit. “That would be the most significant positive indication,” he stated.
