Key Moments
- ING’s Francesco Pesole notes that expectations for additional Bank of England tightening have diminished, with December pricing dropping 10bp to 34bp.
- He anticipates that UK front-end rates will decline more than their eurozone equivalents, providing ongoing support for EUR/GBP beyond the near term.
- Improved risk sentiment is currently weighing on EUR/GBP, but ING expects rate differentials to re-emerge as the main driver once market volatility eases.
ING View on Relative Central Bank Stance
Francesco Pesole of ING underscores that expectations for further Bank of England (BoE) tightening have continued to recede, as policymakers sound less hawkish than their counterparts at the European Central Bank (ECB). In his assessment, this relative shift in policy expectations favors euro strength against sterling over a medium-term horizon.
According to Pesole, this softer stance by the BoE, compared with the ECB, is central to the outlook for both front-end rates and the EUR/GBP exchange rate.
Details on Policy Expectations and Market Pricing
Pesole highlights that:
“Expectations for Bank of England tightening continued to abate yesterday, with pricing for December falling 10bp to 34bp. Alongside optimism on a conflict resolution, BoE officials continue to sound comparatively less hawkish than their ECB counterparts.”
He points to recent commentary from key BoE officials as reinforcing this dynamic:
“Yesterday, both Andrew Bailey and Megan Greene stressed again the need to take second-round effects into consideration (which, in our view, will be limited in the UK) and pointed to patience before assessing the policy implications.”
Front-End Rates: UK vs Eurozone
On the rates outlook, Pesole reiterates ING’s conviction that the short end of the UK curve has more room to decline than in the eurozone. This divergence is expected to underpin the EUR/GBP cross beyond short-term market noise.
He states:
“All in all, the latest developments keep us confident with our call that front-end rates have further to fall in the UK than the eurozone and that should offer lasting support to EUR/GBP beyond the near-term.”
| Aspect | United Kingdom | Eurozone |
|---|---|---|
| Central bank | Bank of England (BoE) | European Central Bank (ECB) |
| Policy tone | Less hawkish, caution on second-round effects | More hawkish relative to BoE |
| Front-end rates outlook | Seen falling further | Expected to fall less than in the UK |
| Expected impact on EUR/GBP | Supports EUR/GBP upside beyond near term | Rate differential favors EUR against GBP |
Short-Term Price Action vs Medium-Term Drivers
Despite the supportive rate backdrop for the euro, Pesole notes that the current trading behavior of EUR/GBP is being influenced by broader risk dynamics rather than policy expectations alone.
He explains:
“For now, the pair is suffering a bit from improved risk sentiment, but rate differentials will return as primary drivers once the dust has settled.”
The analysis concludes that once the impact of improved risk appetite fades, interest rate differentials are expected to reassert themselves as the dominant force shaping EUR/GBP performance.
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