Sterling: Dovish Repricing Points to Weakness vs Euro – ING

ING analyst Francesco Pesole notes that EUR/GBP has retreated to the 0.8550-0.8560 area, trading near 0.85516, as the previous euro premium faded and bond markets calmed. He believes that in a low-volatility environment, the pair will closely track spread movements, but there is room for dovish repricing in market pricing of the Bank of England's rate path, which poses upside risks for EUR/GBP.

**Dovish Repricing as Core Driver**

Pesole's core view is that current market expectations for BoE tightening are too hawkish. According to ING analysis, if the BoE keeps rates unchanged this week as expected, with a 7-2 vote split, it could open a window for subsequent dovish repricing. Should the market lower its expectations for the UK's terminal rate, sterling's rate advantage would diminish, passively pushing EUR/GBP higher.

**Targeting the 0.87 Area**

Based on this logic, ING maintains a bullish stance on EUR/GBP. Pesole expects the pair to gradually climb toward the 0.87 target area over the coming months in a low-volatility environment. This forecast implies roughly 1.7% upside from the current price of 0.85516. Additionally, market reports suggest that uncertainty in the UK's domestic political situation is also seen as a potential factor that could exacerbate sterling weakness and amplify the pair's upward momentum.

**Short-Term Tracking Spread Fluctuations**

Despite the medium-term bullish view, EUR/GBP's near-term trajectory is expected to remain anchored to spread changes. ING believes that in calm market conditions lacking major risk-event catalysts, the pair is unlikely to forge an independent trend, with its fluctuations mainly reflecting movements in the yield differential between eurozone and UK short-term government bonds.