Francesco Pesole at ING highlights the Pound’s resilience despite shifting expectations around the next United Kingdom (UK) Chancellor, with markets seemingly relaxed about fiscal risks. Nonetheless, ING’s short-term fair value model shows EUR/GBP modestly undervalued and Bank of England (BoE) pricing too hawkish, leading them to see upside risks and to target a move back above 0.8700 in EUR/GBP this summer.

EUR/GBP upside risks while Pound stays firm

"Sterling continues to show resilience ahead of changes in the UK government. GBP rallied after Labour MP Wes Streeting endorsed Andy Burnham last week, which we interpreted as markets favouring the prospect of the more centrist Streeting as Chancellor."

"In recent days, however, Energy Secretary Ed Miliband has emerged as a frontrunner for that role, yet the pound has held on to its gains. This suggests either that markets had been pricing a smoother transition via a Burnham ‘coronation’ rather than Streeting becoming Chancellor last week, or that they do not see material risks of fiscal slippage under Miliband."

"In any case, we continue to see upside risks for EUR/GBP. Our short-term fair value model indicates modest undervaluation (around 0.4%), political risk may resurface, and pricing for 25bp of Bank of England tightening still appears too hawkish in our view."

"We continue to target a move back above 0.8700 in EUR/GBP this summer."

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