EUR/GBP: Sterling remains too strong against Euro, says ING

At 2.6–2.8% below its short-term fair value, EUR/GBP reflects a French risk premium, although the discount still appears stretched, according to ING’s Francesco Pesole. In the wake of a hawkish Bank of England rate rise, he sees limited scope for further tightening but considers market expectations for multiple cuts excessive. A return towards 0.840 in EUR/GBP is, in his view, the most realistic prospect over the coming weeks.

EUR/GBP Has Scope to Rise Towards Fair Value

"EUR/GBP continues to trade sharply below its short-term fair value, by around 2.6-2.8% according to our models. That continues to reflect the euro’s idiosyncratic premium related to French risk (EUR/GBP has been one of the favourite channels), but even accounting for that, the decline in the pair looks a bit too stretched."

"The lack of dovish dissenters in November reinforced our view that the BoE will hike again in February, with some risk already in December."

"Market pricing for three more cuts remains far too aggressive in our view, and argues – alongside short-term valuation signals – against further sterling strength against the euro. A return to 0.840 in EUR/GBP remains the most realistic move in the coming weeks, in our view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)