ING strategist Francesco Pesole highlights that the recent rally in the British Pound (GBP) has stalled, with the EUR/GBP currency pair rebounding from a significant break lower. As of the latest data, EUR/GBP is trading at 0.850, which ING's short-term fair value model suggests is approximately 1.5% undervalued [1]. Pesole attributes the previous GBP strength to positioning adjustments and the attractiveness of carry trades, but notes that these factors may be waning [1].
Looking ahead, ING expects EUR/GBP to rise, forecasting a return to 0.870 by the end of the summer. This outlook is influenced by the perceived overvaluation of sterling and the anticipation of political change in the UK, specifically mentioning Andy Burnham becoming UK Prime Minister next week [1]. Pesole warns that the combination of short-term overvaluation and political transition presents risks for the pound [1].
On the monetary policy front, ING sees downside risk for front-end GBP rates, arguing that current market pricing for 35 basis points of Bank of England tightening by year-end is overly aggressive. ING's recommendation is to hold, maintaining their forecast for a EUR/GBP recovery [1].
CONCLUSION
ING strategists believe the British Pound is overvalued and expect EUR/GBP to recover towards 0.870 by the end of summer, citing political changes and aggressive market rate expectations as key risks. The market may need to adjust its outlook on Bank of England tightening, which ING views as too optimistic. Overall, ING maintains a cautious stance on sterling in the near term.