ING analysts see markets as overly aggressive on Bank of England expectations, with easing priced out after the Iran conflict. They note EUR/GBP’s negative correlation with Oil and warn that no rate changes are now expected by year-end. Valuation metrics suggest downside in EUR/GBP below 0.860 would look stretched without BoE hike pricing.

BoE expectations seen overextended

"EUR/GBP continues to show a negative correlation to oil prices, in our view, primarily on the back of the notion that the UK has had a bigger inflation problem and the Bank of England’s policy is set to be affected by energy prices more deeply."

"Our valuation metrics also suggest a move below 0.860 would be rather stretched unless markets start to seriously price in a rate hike by the BoE."

"Our concern remains that markets have priced out BoE easing too aggressively. The two-year GBP swap rate has jumped 50bp since the Iran conflict started, with now no rate changes expected by year-end."

"Any positive surprises on the de-escalation front carries meaningful EUR/GBP upside risk, in our view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)