TD Securities strategists see asymmetric downside risks for the British Pound (GBP) against the Euro (EUR). They argue that EUR/GBP appears notably undervalued relative to rate differentials, data surprises and equity performance. While markets expect the European Central Bank (ECB) to keep rates on hold in July, hawkish guidance for the rest of 2026 could support the Euro and push EUR/GBP back toward 0.86.

Pair seen rebounding toward 0.86

"The EUR has broadly weakened vs major global currencies except SEK and CHF over the past three months. We find the EUR likely has the biggest dislocation in EUR/GBP now."

"Market participants broadly expect the ECB to keep rates on hold at this meeting. Falling global energy prices after the US and Iran signed the MoU [Memorandum of Understanding] in June reduced the urgency for rate hikes at consecutive meetings."

"FX vol market is not pricing any risk premium for the July ECB meeting as market participants broadly expect Lagarde to maintain the data-dependent forward guidance."

"EUR/USD will likely stay muted on next week's ECB. EUR/GBP should see asymmetric upside risks in case of hawkish guidance."

"EUR/GBP should see asymmetric upside if Lagarde provides hawkish guidance for the rest of 2026 at the ECB press conference. We see room for EUR/GBP to rebound toward 0.86 again as market focus returns to macroeconomic fundamentals."

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