Analysts at ING said that 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 core retail sales for April, with the underlying figure, excluding motor fuels, down 2.0%. Furthermore, March sales data was revised downward.
This follows the release of a weak UK Purchasing Managers' Index (PMI) report on Sunday, which indicated a slight rise in manufacturing but was overshadowed by a decline in the services sector, pulling the composite index to 52.8.
The financial institution noted that the British pound currently appears overvalued compared to the euro. This assessment comes on the heels of a significant tightening adjustment in the Sonia curve, which ING considers excessive, especially since the unexpectedly high services CPI for May can partly be attributed to one-time items.
Moreover, there are signs that a more dovish stance is emerging within the Bank of England's Monetary Policy Committee. Market expectations are leaning towards only 33 basis points of easing by the end of the year and less than 10 basis points for the next meeting in August.
Despite this, ING still expects a rate cut in August, rejecting the idea that the UK vote could delay monetary easing. ING highlighted the potential for the short-term swap rate gap between the euro and sterling to shift in favor of the euro, especially with the European Central Bank likely to take a hawkish stance and the Bank of England expected to implement a rate cut in 2019. August.
In addition, the upcoming vote in July in the UK may add a slight political risk premium to the pound. Given these considerations, ING maintains its forecast that the EUR/GBP pair is likely to rise in the long term.
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