Further widening of the monetary policy divergence needed to keep EUR/GBP sustainably depressed – ING

Economists at ING analyze EUR/GBP outlook.

The 0.8500 support is under threat

The Sonia curve is fully pricing in a 6.0% peak rate in the UK, while markets are not convinced the ECB will hike rates at all. Incidentally, the Euro is more exposed to China than the UK. That would suggest the 0.8500 support in EUR/GBP is under threat, and we definitely don’t exclude it will be tested or broken temporarily in the coming days.

However, the short-term swap differential when the pair last traded at 0.8500 (mid-July) was around 20-25 bps wider in favour of GBP, meaning that a further widening of the monetary policy divergence may well be needed to keep EUR/GBP sustainably depressed.