Investing.com — Sterling’s rally against the euro over the past month has been driven by positioning, carry and merger-and-acquisition flows rather than any lasting improvement in British fundamentals, ING Economics said on Thursday, forecasting the currency will hand back its recent gains as fiscal risks return.
The analysts said EUR/GBP would rise to 0.88 by year-end and push to 0.90 in 2027, from current levels near 0.85. GBP/USD is expected to trace out a 1.32-1.36 range, based on ING’s view that the U.S. Federal Reserve does not tighten further in this cycle and the dollar softens.
Sterling has rallied about 2% against the euro over the past month, ING said, but the move does not reflect a classic re-rating of UK assets.
The broker noted that a UK risk premium remains embedded in the gilt market but has evaporated in sterling, meaning the two markets are telling different stories about Britain’s economic health.
ING attributed the currency move largely to a short squeeze. Speculators had turned exceptionally bearish on sterling ahead of UK local elections in early May, on the assumption that poor results would end Prime Minister Keir Starmer’s premiership.
The risk reversal, the cost of buying a EUR/GBP call over an equivalent put option, rose to the most expensive levels since April 2025, when global markets were in turmoil following President Donald Trump’s “Liberation Day” tariffs. When sterling failed to sell off after the election results, the market was caught short.
ING also cautioned against overweighting M&A activity as a driver. Pending and completed deals for UK companies this year total £220 billion on some measures, with announced inbound flows running at record highs in sectors including financials, consumer staples and industrials.
But over the past 25 years, net portfolio flows have on average been nearly five times larger than net direct investment flows, ING said, adding that M&A flows “rarely drive sustained moves in currencies.”
The broker said the central driver of EUR/GBP going forward will be Bank of England policy. ING’s house call is for UK rates to remain unchanged while the European Central Bank raises rates one more time to 2.50% over the next six to nine months, a rate spread that implies EUR/GBP should trade higher.
On the fiscal side, ING flagged growing spending pressures in defence, health and social care, alongside high and rising debt interest costs. Gilt issuance is falling, from £303 billion in FY2025 to £246 billion in the current fiscal year, but ING said Chancellor Andy Burnham’s stated openness to larger fiscal changes, including lifting the tax-free allowance, means a bolder autumn budget cannot be ruled out. Burnham’s first budget is expected in October or November.
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