Anna 
Analysts at ING have identified the EUR/GBP currency pair as undervalued following the release of weaker-than-expected UK retail sales data. The report indicated a 2.7% year-over-year decline in headline retail sales for April, with core sales, excluding auto fuel, falling by 2.0%. Additionally, March’s sales figures were revised downwards, further impacting market sentiment.
This data follows a lackluster UK Purchasing Managers’ Index (PMI) report from Sunday. While there was a slight uptick in manufacturing, a decline in the services sector dragged the composite index down to 52.8. This combination of weak retail sales and subdued PMI data suggests economic challenges for the UK.
ING analysts argue that the British pound appears overpriced relative to the euro, a view supported by the recent hawkish adjustment in the Sonia curve, which they consider excessive. The unexpectedly high services Consumer Price Index (CPI) for May is partly attributed to one-off factors, suggesting that underlying inflationary pressures may not be as strong as initially perceived.
Furthermore, there are signs of a more dovish stance emerging within the Bank of England’s Monetary Policy Committee (MPC). Current market expectations are for only 33 basis points of easing by the end of the year and less than 10 basis points for the upcoming August meeting. Despite this, ING anticipates a rate cut in August, dismissing concerns that the UK vote might delay monetary easing.
ING also highlighted the potential for the short-term swap rate gap between the euro and the pound to shift in favor of the euro. This shift could be driven by the European Central Bank (ECB) adopting a more hawkish stance while the Bank of England proceeds with a rate cut in August.
Additionally, the upcoming July vote in the UK could introduce a minor political risk premium into the pound. Taking these factors into account, ING maintains a bullish outlook on the EUR/GBP pair, predicting it will rise over the longer term.
Overall, ING’s analysis suggests that the EUR/GBP pair presents a favorable opportunity for investors, given the current economic conditions and anticipated monetary policy changes.
