Analysts at ING said the currency pair appears undervalued after UK retail sales data came in below expectations.
The report released today showed a 2.7% year-on-year decline in overall retail sales for April, with the core figure excluding motor fuels down 2.0%. Moreover, March sales data were revised downwards.
It follows a subdued UK Purchasing Managers’ Index (PMI) report on Sunday, which showed modest growth in manufacturing but was overshadowed by a decline in the services sector, sending the composite index down to 52.8.
The financial institution noted that the British pound currently appears overvalued compared to the euro. The estimate comes after a significant correction to the Sonia curve, which ING considers excessive, especially given that the unexpectedly high consumer price index (CPI) for services in May can be partly attributed to one-off elements.
Moreover, there are signs that the Bank of England’s Monetary Policy Committee (MPC) is taking a softer stance. Market forecasts are leaning towards policy easing of just 33 basis points by the end of the year and less than 10 basis points by the upcoming meeting in August.
Despite this, ING still expects a rate cut in August, dismissing the idea that the UK vote could delay monetary easing. ING highlighted that the short-term gap in swap rates between the euro and sterling could shift in favor of the euro, especially with the European Central Bank (ECB) likely to take a hawkish stance and the Bank of England expected to cut rates in August.
Additionally, the upcoming July vote in the UK could see the pound priced into a small political risk premium. Given these considerations, ING maintains its outlook that EUR/GBP is likely to rise over the longer term.
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