GBP: Non-negligible risk premium - ING

Recent UK data releases have not endorsed the market's tentative speculation on faster Bank of England easing, and two-year GBP swap rates are around 8bp above last week's lows. Expectations are firmly back on a cut in August and one in December - which is also our call, ING's FX analyst Francesco Pesole notes.

No meaningful impact on the pound this morning

"With the rewidening of the EUR:GBP short-term rate differential in favour of the pound over the past couple of weeks, EUR/GBP's resilience suggests markets are attaching some risk premium to the pair, which we currently estimate to be 0.8% overvaluation. That may appear contained, but it's already close to the upper bound of the 1.5 standard deviation band that would signal stretched misvaluation."

"That GBP risk premium is partly because of the euro's idiosyncratic strength (due to its appeal as a reserve currency) but may also embed some UK budget concerns. Those were fuelled further this morning as the UK unveiled larger borrowing for June (£20.7bn) than expected by the UK fiscal watchdog. There is no meaningful impact on the pound this morning, but that probably raises the chances even further of tax hikes this autumn, a prospect that can keep GBP upside capped."