SKN | ING Sees Sterling Overvalued as EUR/GBP Rebound Toward 0.840 Comes Into Focus

Key Takeaways:

• ING estimates that EUR/GBP is trading 2.6%–2.8% below its short-term fair value, suggesting that sterling’s recent strength against the euro may be overstretched.
• French-related risk remains a key source of pressure on the euro, although ING believes the resulting weakness in EUR/GBP has gone too far.
• ING expects limited additional Bank of England tightening and identifies a return toward 0.840 as the most plausible near-term direction for EUR/GBP.

Sterling Strength Creates a Valuation Disconnect

ING strategist Francesco Pesole argues that sterling has become overvalued against the euro, with EUR/GBP trading approximately 2.6%–2.8% below the bank’s short-term fair-value estimate. The gap suggests that the recent decline in the currency pair, reflecting relative strength in the pound, may have extended beyond what underlying valuation signals justify.

Pesole identifies an additional risk premium associated with France as a significant factor behind the euro’s recent weakness. Political and country-specific concerns have contributed to an idiosyncratic premium in the euro, with EUR/GBP serving as one of the principal channels through which that uncertainty has been reflected in currency markets.

However, ING’s assessment is that the resulting adjustment has become excessive. Even after accounting for the French-related premium, the current level of EUR/GBP appears too low relative to the bank’s short-term valuation framework.

For investors and institutions managing sterling- and euro-denominated exposures, this creates a distinction between near-term market positioning and the underlying valuation relationship. A currency pair can remain under pressure while risk premiums persist, but a widening deviation from estimated fair value may increase the potential for a reversal if those pressures ease.

Bank of England Policy Expectations and Sterling Support

Monetary policy remains central to the outlook. Pesole acknowledges that the Bank of England’s recent hawkish rate increase has supported sterling, while the absence of dovish dissenters at the November meeting reinforced ING’s expectation of another increase in February, with some possibility of an earlier move in December.

Nevertheless, the bank sees limited scope for further tightening beyond this expected adjustment. The distinction between a near-term rate increase and the broader policy trajectory is important because currency markets respond not only to current interest rates but also to expectations about the direction and duration of monetary policy.

ING considers market expectations for three additional rate cuts to be too aggressive. In its assessment, this pricing does not align with the bank’s policy outlook and, alongside the short-term valuation gap, provides a reason to question whether sterling can continue strengthening against the euro.

The currency outlook therefore reflects two competing forces. The recent hawkish shift in Bank of England expectations has supported the pound, while ING’s valuation framework suggests that this support may already be reflected excessively in the exchange rate.

EUR/GBP Rebound Becomes ING’s Preferred Near-Term Scenario

Combining its valuation assessment with its expectations for Bank of England policy, ING sees a recovery in EUR/GBP as more likely than another sustained period of sterling appreciation.

Pesole identifies 0.840 as the most realistic near-term destination for the pair over the coming weeks. Such a move would represent a partial reversal of the recent decline and a correction of the gap between prevailing market levels and ING’s estimated short-term fair value.

The outlook remains conditional on the factors currently influencing the exchange rate. French-related risk premiums could continue to weigh on the euro, while changes in Bank of England expectations could alter sterling’s relative support. The timing and scale of any rebound will therefore depend on how these influences develop.

For investors with cross-border portfolios, corporate treasury operations or liabilities in both currencies, the distinction between short-term valuation and policy-driven movements remains relevant. Exchange-rate adjustments can affect the value of international assets and obligations even when the underlying economic exposure has not changed.

Closing Insights

ING’s assessment points to a potential turning point in the sterling-euro relationship. The pound has benefited from hawkish Bank of England expectations and euro-specific risk premiums, but the resulting EUR/GBP decline has moved materially below the bank’s estimated short-term fair value. With ING expecting limited further monetary tightening and identifying 0.840 as a plausible near-term level, the balance of risks appears to be shifting toward a recovery in the euro against sterling.

The broader implication is that currency valuations should be assessed alongside monetary policy expectations and country-specific risk premiums. For internationally exposed investors and businesses, these factors can influence currency allocation, liquidity planning and the management of cross-border financial commitments.

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