British Pound: Sterling rally against Euro looks stretched - TD Securities

TD Securities’ Macro Research team, led by Howard Du with contributions from Jayati Bharadwaj and Linda Cheng, argues that the recent Pound strength versus the Euro has overshot fundamentals. They highlight that EUR/GBP has broken below a key 0.86 support on reduced UK political risk, but still forecast a return to 0.86 in 2026 as macro and policy drivers realign.

TD sees EUR/GBP undervaluation stretched

"The GBP has idiosyncratically rallied on falling UK political risk premium in July. We see the EUR/GBP move as overdone vs macroeconomic fundamentals and continue to forecast a return to 0.86 for this pair in 2026."

"0.86 has been a key support level for EUR/GBP throughout the past year, but falling UK political risk in July led to a notable selloff in this pair. Starmer's official resignation on June22 kicked off the bearish EUR/GBP momentum. Burnham's commitment to existing UK fiscal rules and headlines of Miliband potentially not becoming the next UK Chancellor further reduced political risk premium and pushed EUR/GBP below 0.85."

"As a result, EUR/GBP spot now sits at the cheapest level vs our high-frequency fair value estimate since March 2025. A recent analog of persistent EUR/GBP cheapness vs fair value would be May-July 2024. At the time, EUR/GBP also fell from 0.86 to 0.84 on the start of ECB rate cutting cycle and elevated French political risk."

"While we do not expect the BoE to cut rates imminently, we still expect its next move as more likely to be a cut than a hike. We also see further ECB-BoE monetary policy convergence as the ECB hike rates in September, and for UK political risk premium to rebuild in Q4 2026 as the market scrutinizes UK Autumn Budget."

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