Analysts at ING said the currency pair appears undervalued after retail sales in Britain fell below expectations.
The report released today showed a 2.7% year-on-year decline in total retail sales for April, with the core figure, excluding car fuel, down 2.0%. In addition, March sales data was revised downwards.
This follows a subdued UK Purchasing Managers’ Index (PMI) report on Sunday, which indicated a slight rebound in manufacturing but was overshadowed by a decline in the services sector, sending the composite index down to 52.8.
The financial institution pointed out that the British pound currently appears overpriced compared to the euro. This assessment comes in the wake of a significant aggressive adjustment of the Sonia curve, which ING considers excessive, especially as the unexpectedly high consumer price index (CPI) for services in May can partly be attributed to one-off items.
Moreover, there are indications of a more dovish attitude within the Bank of England’s Monetary Policy Committee (MPC). Market forecasts lean towards a easing of only 33 basis points by year-end and less than 10 basis points for the upcoming August meeting.
Despite this, ING still expects a rate cut in August, rejecting the idea that the British mood could delay monetary easing. ING highlighted the potential that the short-term swap rate spread between the EUR and the GBP could shift in favor of the euro, especially with the European Central Bank (ECB) potentially taking an aggressive stance and the Bank of England expected to implement a rate cut in the eurozone . August.
Furthermore, the upcoming July vote in Britain could result in a small political risk premium being settled in the pound. Given these considerations, ING maintains its expectation that the EUR/GBP pair is likely to rise in the longer term.
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