Key Moments
- ING analysts judge current market expectations for Bank of England policy as overly hawkish, with easing fully priced out after the Iran conflict.
- They highlight EUR/GBP’s ongoing negative relationship with oil prices, linked to the UK’s greater inflation challenges and energy sensitivity.
- ING’s valuation work indicates that EUR/GBP levels below 0.860 would appear overstretched unless markets begin to price in a BoE rate hike.
BoE Outlook Viewed as Too Hawkish
ING analysts argue that investors have shifted too far toward a hawkish stance on the Bank of England (BoE), especially following developments related to the Iran conflict. According to their assessment, expectations for policy easing have been removed from market pricing, and no rate adjustments are now anticipated by the end of the year.
They point to a sharp repricing in UK rates markets as evidence of this shift: “The two-year GBP swap rate has jumped 50bp since the Iran conflict started, with now no rate changes expected by year-end.”
Oil Prices and EUR/GBP Dynamics
ING highlights the persistent inverse relationship between EUR/GBP and oil prices, tying this to the structure of the UK’s inflation backdrop and the BoE’s sensitivity to energy costs.
“EUR/GBP continues to show a negative correlation to oil prices, in our view, primarily on the back of the notion that the UK has had a bigger inflation problem and the Bank of England’s policy is set to be affected by energy prices more deeply.”
Valuation Signals and EUR/GBP Levels
On valuation grounds, ING cautions that further declines in EUR/GBP may be difficult to justify without a shift in expectations toward additional BoE tightening.
“Our valuation metrics also suggest a move below 0.860 would be rather stretched unless markets start to seriously price in a rate hike by the BoE.”
| Indicator | ING View / Observation |
|---|---|
| BoE policy expectations | Markets seen as having priced out easing too aggressively |
| 2-year GBP swap rate move | “Jumped 50bp since the Iran conflict started” |
| EUR/GBP level of concern | Move below 0.860 viewed as stretched without BoE hike pricing |
| Oil price relationship | Negative correlation with EUR/GBP highlighted |
Geopolitical De-escalation and FX Risk
Looking ahead, ING warns that any easing of geopolitical tensions could have important implications for the cross.
“Any positive surprises on the de-escalation front carries meaningful EUR/GBP upside risk, in our view.”
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