EUR/GBP: Sterling’s strength against the Euro remains excessive – ING

A recovery towards 0.840 in EUR/GBP is the most realistic outcome over the coming weeks, according to ING’s Francesco Pesole, who sees the pair’s decline as stretched. It is trading 2.6–2.8% below short-term fair value, reflecting a French risk premium. After a hawkish rate hike by the Bank of England, Pesole expects limited additional tightening, while judging market expectations of multiple cuts to be too aggressive.

Does fair value signal a recovery in EUR/GBP?

"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.)