ING Flags Overvalued Sterling as EUR/GBP Set to Rebound

Key Moments

Valuation Signals Suggest Upside for EUR/GBP

ING strategist Francesco Pesole highlights that EUR/GBP is trading materially below what the bank’s short-term valuation framework indicates as fair. According to Pesole, the cross is currently around 2.6-2.8% under its modeled fair value, signaling that the recent move in favor of the pound appears overdone.

He notes that this mispricing continues to be driven by an “idiosyncratic premium” in the euro connected to French risk, and that EUR/GBP has been “one of the favourite channels” through which this risk has been expressed. Even after accounting for that premium, Pesole argues that the downside in the pair has gone too far.

Bank of England Outlook and Policy Expectations

On the policy front, Pesole points to the recent hawkish Bank of England rate increase as an important factor, but sees limited room for additional tightening from here. He emphasizes that the absence of dovish dissenters at the November meeting “reinforced our view that the BoE will hike again in February, with some risk already in December.”

At the same time, he argues that current interest rate expectations are misaligned with ING’s view. “Market pricing for three more cuts remains far too aggressive in our view, and argues – alongside short-term valuation signals – against further sterling strength against the euro,” Pesole says.

EUR/GBP Tactical View

Given these combined valuation and policy dynamics, Pesole expects the pound’s relative strength to fade. He maintains that a reversal higher in EUR/GBP is the more likely path in the near term, stating: “A return to 0.840 in EUR/GBP remains the most realistic move in the coming weeks, in our view.”

Valuation and Target Summary