ING analysts Chris Turner, Francesco Pesole and James Smith argue Sterling’s summer strength is driven by positioning, carry and possible M&A flows rather than UK fundamentals. They expect UK short-dated rates to drift lower and fiscal risks to resurface into autumn, seeing EUR/GBP rising towards 0.88 by year-end and 0.90 in 2027, while GBP/USD trades within a 1.32-1.36 range.

Summer rally seen on weak foundations

"Sterling’s rally has been driven more by positioning, carry and potentially some M&A flows than by a lasting improvement in UK fundamentals. With UK short-dated rates likely to drift lower and fiscal risks set to return ahead of the autumn, we expect sterling to hand back recent gains. Our central view remains for EUR/GBP to rise towards 0.88 by year-end."

"Our call on rate spreads suggests EUR/GBP should trade higher from here. But what about the fiscal story? Could there be any surprises there?"

"In short, there’s a more positive near-term public finance story even if longer-term, it’s hard to see how borrowing doesn’t increase over and above current budget plans."

"And based on our view that the Fed does not tighten in this cycle and the dollar softens, GBP/USD should continue to trace out a 1.32-1.36 range."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)