Sterling has gained ground versus the euro over the past week despite a generally firmer U.S. dollar, with ING identifying a sharp fall in the EUR/GBP rate on Tuesday that coincided with a broader market deleveraging episode.
In a research note published on Thursday, the bank said the currency moves were driven in part by positioning dynamics. ING pointed to large net short sterling exposures that asset managers had accumulated while maintaining long euro positions, creating a compressed risk profile that amplified moves when portfolios were adjusted.
The note also cited changes at the front end of the interest rate curve. Markets have repriced the probability of Bank of England easing, pushing near-term yields higher and providing additional support for the pound relative to the euro.
Snapshot market quotes at 10:35 GMT on Thursday showed the British pound down against the U.S. dollar, with GBP/USD trading 0.19% lower at 1.3348. At the same time, the euro was marginally weaker versus sterling, with EUR/GBP slipping 0.01% to 0.8699.
ING's UK economist, James Smith, moved his expected timing for the first BoE rate cut back by one month, from March to April, according to the note. He nonetheless retained a view for two cuts over the course of the year, and that trajectory should be consistent with EUR/GBP trading at around 0.88 or higher if those cuts materialize.
Despite the recent sterling outperformance, ING warned that the pound could be poorly positioned if gilt markets come under renewed pressure. The bank outlined a scenario in which elevated energy prices constrain or reverse monetary easing cycles - a development that could prompt populist governments to reinstate energy subsidies and add stress to bond markets.
ING drew a direct line to the market dynamics seen in 2022, which culminated in a gilt market crisis later that year, as an example of how these forces can interact and intensify strains in fixed-income markets.
Market context
The move in EUR/GBP during the deleveraging episode and the shift in short-end rate expectations are the central drivers cited by ING for sterling's recent relative strength. The bank emphasizes that positioning and fixed-income market dynamics remain key variables for further currency direction.