EUR/GBP: between the BoE and Brexit – Danske Bank

Analyst at Danske Bank Aila Mihr gave her views on the European cross in light of the shift in tone from the BoE and the ongoing Brexit negotiation.

Key Quotes

“With the prospect of a BoE rate hiking cycle materialising earlier than we forecast previously, GBP has been brought alive yet again. In an environment where the EUR uptick is losing steam a bit and the market remains stretched on GBP shorts, we have to admit that risks in EUR/GBP are now more balanced than we have laid out (previously, we saw risks tilted to the upside for the cross near term)”.

“That said, our position remains that EUR/GBP will have a hard time breaking significantly lower from here as Brexit uncertainty is set to be a subjugate for sterling for an extended period of time”.

“Near term, the cross should be capped around the 0.88 level (which prevailed before the summer uptick) but, further out, if the BoE initiates a hiking cycle, the adjustment towards fundamentals – our Brexit-corrected Medium-Term Valuation (MEVA) estimate for the cross is around 0.83 – could take place faster than our current forecasts (0.88 in 12m) project”.