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Analysts at the independent research house TS Lombard see the ECB 'outhawking' the Bank of England.
A new strategy note looks to sell the pound against the euro on the basis of central bank policy divergence.
"We like long EUR/GBP as the ECB has more room to hike rates than does the BoE," says Daniel Von Ahlen, an analyst at TS Lombard.
The call came on the eve of the European Central Bank's (ECB) policy decision, due Thursday, where interest rates will be raised again.
The hike has been long expected by the market, and on the day shouldn't materially impact FX markets. But, the implications of a more 'hawkish' ECB - one that will lift rates further in the coming months - will be keenly felt by the pound-to-euro exchange rate.
The pair has steadily fallen from the July peak at 1.1820 to reach 1.1642 by the time of writing Thursday. Pound Sterling Live predicts that the short-term fall can continue before a recovery and rally emerge into year-end.
However, that view is challenged by TS Lombard:
"While the chances of BoE rate hikes have improved owing to the momentum in natural gas prices, we think the three hikes priced in by mid-2027 are too aggressive a path for the BoE to follow," explains Von Ahlen.
The Bank of England's Governor Andrew Bailey on Tuesday pushed back on the market's assumption that it must raise rates on three occasions in the coming months. "What I want to dispel is the idea that we've really got a secret plan, we know where we're going to go to and it's unconditional," Bailey told the Treasury Select Committee.
Currency markets are highly sensitive to interest rate market developments, favouring currencies where rates are to rise against those where rates will be static.
For GBP/EUR, the policy question therefore presents a downside risk if the market's expectations of the Bank of England's rate path are not met at the same time the ECB delivers rate hikes.
"We see a greater likelihood of the ECB being able to meet what's priced into rates markets (relative to the BoE) as the domestic labour market remains strong, there are signs of an acceleration in euro area wage growth, GDP growth for the bloc is holding up relatively well and German capex orders are now soaring," says Von Ahlen.
