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The pound-to-euro rate trades more than 1.5 standard deviations above fair value, and a quantitative model at a French bank has triggered a short.
Crédit Agricole's FAST FX model has flagged the Pound to Euro exchange rate as overvalued and opened a trade betting on a reversal, adding weight to the tactical case for a pullback ahead of Wednesday's Budget.
The pair is at 1.1939, holding close to Friday's 17-month high at 1.1959.
The model, run by Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, buys EUR/GBP, equivalent to selling pound-to-euro.
"EUR/GBP is falling faster than its fair value remaining more than 1.5 standard deviations undervalued. The FAST FX model has triggered another long EUR/GBP trade with a take-profit level of 0.8467," says Marinov.
The take-profit at 0.8467 in EUR/GBP equates to 1.1811 in pound-to-euro, a fall of just over a cent from current levels.
Unless the level is reached, the model closes the position at 22:00 GMT on Friday 30 October, which makes this a trade on the Budget and Thursday's European Central Bank decision.
Why Fair Value Has Shifted
Fair value in the model is set by rate differentials and bond spreads, and both have moved against the pound's recent gains.
"EUR/GBP's fair value fell from 0.8523 to 0.8467 due to a rise in the peripheral EGB yield spread to Bunds, which was partly offset by a fall in the Eurozone-UK short-term rates spread as well as a rise in the Eurozone-UK box yield spread," says Marinov.
The fall in fair value means French and peripheral bond stress has earned the euro some of its weakness, with the gap between French and German ten-year borrowing costs, the favoured measure of French stress, at 170 basis points, a level last seen in 2011.
The exchange rate has fallen further than that stress justifies, which is the gap the model is trading.
Long-time Sterling Bulls Call Time on the Rally
The trade follows the same short-term tactical strategy set out in our week ahead forecast, which looks for consolidation and a shallow pullback this week with the Budget the key downside risk.
Bank of America, which held an out-of-consensus bullish view on the pound against the euro through 2026, turned neutral on Friday after its 0.84 EUR/GBP target was reached, with FX strategist Kamal Sharma citing a run of data surprises unlikely to persist, one-sided options positioning and underpriced Budget risk.
"We would anticipate GBP to consolidate in the coming sessions as the Budget looms," says Sharma.
The Relative Strength Index (RSI), a momentum gauge where readings above 70 mark an overbought market, has turned lower from a record reading but sits at 76, so stretched conditions have further to unwind.
Our medium-term view is unchanged: the uptrend is intact, dips towards 1.1850 are likely to be bought, and 1.20 remains the year-end target once the Budget passes without incident.
A move to Crédit Agricole's 1.1811 take-profit would sit inside that pullback zone, and a close above 1.1959 before Friday would leave the model's call unrewarded.
