EUR/GBP has bounced back higher from the 0.8500 level. Nevertheless, economists at ING do not expect the pair to extend its rally.
Strengthening domestic story
The UK has continued to experience some repricing higher in growth expectations, as PMIs inched higher again in February. If the ECB had to convince markets that rate cut expectations were overly optimistic, the Bank of England has the ‘privilege’ of letting data do the talking.
The rebound in EUR/GBP from the excessively cheap 0.8500 low did not surprise us. But we have some doubts the pair can rally further in the near term, as markets may be more inclined to push 2024 ECB easing expectations back to 100 bps (now 90 bps) rather than pricing in three full cuts in the UK (now, 62 bps). Still, our medium-term view remains bullish on the pair on the back of policy divergence.
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