ING strategist Francesco Pesole notes that the recent GBP rally has stalled and EUR/GBP has rebounded from an important break lower. At 0.850, the cross remains around 1.5% undervalued versus ING’s short-term fair value model. With aggressive market pricing for Bank of England tightening and political change in the UK, Pesole expects EUR/GBP to return towards 0.870 by end-summer.

ING expects EUR/GBP to rise as sterling remains overvalued

"EUR/GBP has rebounded after an extended run of an important break lower. Still, at 0.850, it remains around 1.5% undervalued according to our short-term fair value model."

"As discussed recently, positioning adjustments and carry trade attractiveness likely played an important role in driving GBP strength. But approaching a change in government (Andy Burnham becomes UK Prime Minister next week) with short-term overvaluation is a risk for the pound."

"Incidentally, we still see plenty of downside risk for front-end GBP rates. Market pricing for 35bp of tightening by year-end looks way too aggressive. Our call remains a hold. We still expect a return to 0.870 in EUR/GBP by the end of the summer."

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