ING analysts said the currency pair appeared undervalued after UK retail sales data came in below expectations.

The report released today showed a 2.7% year-on-year decline in core retail sales in April, with core value excluding motor fuel down 2.0%. Moreover, March sales data were revised downwards.

This follows Sunday’s UK Purchasing Managers’ Index (PMI) report, which showed slight growth in manufacturing but was overshadowed by a decline in the services sector, which saw the composite index fall to 52.8.

The financial institution has pointed out that the British pound currently appears overvalued compared to the euro. This assessment follows a significant hawkish revision to the Sonia curve, which ING considers excessive, especially since the unexpectedly high Consumer Price Index (CPI) for May can be partially attributed to one-off items.

Moreover, there are indications that the Monetary Policy Committee (MPC) of the Bank of England takes a more dovish stance. Market projections favor monetary policy easing by just 33 basis points by the end of the year and less than 10 basis points at the upcoming meeting in August.

Nevertheless, ING continues to predict a rate cut in August, rejecting the view that the UK vote could delay monetary easing. ING highlighted the possibility of the short-term swap rate gap between EUR and GBP shifting in favor of the euro, especially with the European Central Bank (ECB) likely to adopt a hawkish stance and the Bank of England expected to cut interest rates in August.

In addition, the upcoming July vote in the UK may result in a miniature political risk premium being included in the pound. Taking these considerations into account, ING maintains its forecast that the EUR/GBP pair is likely to rise in the longer term.

This article was generated with the assistance of AI and reviewed by an editor. More information can be found in our Regulations.