ING strategist Francesco Pesole states that the EUR/GBP currency pair has limited further downside after slipping below the 0.8700 level in the past 24 hours, attributing this to ongoing United Kingdom (UK) political risks and what he describes as 'stretched' Bank of England (BoE) tightening expectations, which offset risk-on market pressures [1]. Pesole emphasizes that while risk-on episodes can weigh on EUR/GBP, rate differentials are typically the more durable driver for the pair [1].
He notes that the recent UK inflation data do not alter the broader outlook, with the BoE expected to remain on hold through the end of the year [1]. Specifically, Pesole points out that the 41 basis points of tightening currently priced into the GBP curve appears stretched compared to the 54 basis points of expected European Central Bank (ECB) tightening, suggesting that this dynamic should be sufficient to keep the BoE from raising rates next week and likely until year-end [1].
Regarding inflation, ING's base case anticipates a brief peak around 4%, with inflation oscillating between 3.5% and 4% in the second half of the year. However, current gas pricing trends indicate a peak closer to 3.5%, which Pesole argues is still not enough to force a BoE rate hike [1].
Overall, the analysis suggests that while the EUR/GBP has experienced some downside, further declines are likely to be limited due to the interplay of political risk, rate expectations, and inflation dynamics in the UK and Eurozone [1].
CONCLUSION
ING's analysis indicates that EUR/GBP downside is likely limited, with political risks and rate expectations supporting the pair. The BoE is expected to remain on hold through year-end, as current inflation and gas price trends are not seen as sufficient to prompt further tightening.