EUR/GBP remains on the soft side, having fallen about 1.5% since the start of the Iranian conflict. The currency cross has been pressured as market pricing for sterling has shifted more hawkish and equities have held up, shaping flows and risk appetite in currency markets.
According to an ING analyst speaking on Wednesday, two forces have been prominent in recent trading. First, a pronounced hawkish repricing along the UK yield curve has supported the pound. Second, the relative resilience of equity markets has reduced the incentive for investors to move out of higher-beta sterling into lower-beta euro exposure, limiting demand for the euro against the pound.
ING cautions that the downward move in EUR/GBP is beginning to look stretched when viewed through the bank's short-term valuation metrics. Those measures suggest the current weakness may overshoot what fundamentals alone would justify.
Crucially, ING points to the fall in oil prices below $90 on Wednesday as a potential trigger for a reassessment of UK rate expectations. A further easing in oil could alleviate inflation pressures and encourage some market participants to trim hawkish expectations for UK interest rates. In that scenario, ING says EUR/GBP could correct higher.
On specific levels, the bank prefers a rebound toward 0.870 for the euro-sterling cross rather than a further fall to 0.860.
Market context and implications
- Currency markets: EUR/GBP has declined roughly 1.5% since the start of the Iranian conflict and is trading on the soft side.
- Fixed income: Hawkish repricing in the UK curve has been a key driver of sterling strength.
- Equities: Relative equity resilience has tempered flows from higher-beta GBP into lower-beta EUR.
ING's assessment underscores the sensitivity of the pair to shifts in oil prices and interest-rate expectations. If oil remains below $90 and market participants reassess the path for UK rates, the bank expects a corrective move higher in EUR/GBP.