EUR/GBP: At 0.89 in a 1-3 month perspective, risks skewed to the upside - Danske Bank

According to analysts from Danske Bank, Brexit continues to be the main driver, keeping the pound undervalued and volatile in the time to come. They see that clarification around the negotiations should eventually support an appreciation of the currency.

Key Quotes: 

“The Bank of England (BoE) voted unanimously to keep the bank rate at 0.75% in September. With a relatively flat money-market curve, the next BoE rate hike is priced to arrive in November 2019. Our expectation is that BoE will hike once a year and that the next hike will arrive in May 2019. Although this is slightly earlier than what the market expects, we emphasise that the Brexit negotiations will be critical for further developments in the GBP.”

“With Brexit negotiations entering a critical phase, we expect EUR/GBP to remain very volatile and sensitive to any Brexit news. From a 1-3M perspective we target EUR/GBP at 0.89 with risks skewed to the upside in the near term. The annual UK Conservative Party Conference (30/9 to 3/10) is an important hurdle and potential source of volatility, before the final negotiations. Longer term, we still expect EUR/GBP to trade lower eventually, driven by Brexit clarifications and fundamental valuations. We target EUR/GBP at 0.89 in 1-3M, 0.84 in 6M and 0.83 in 12M.”