Limited upside to EUR/USD, GBP to stabilise short-term – Danske Bank

Research Team at Danske Bank, sees limited upside to EUR/USD from higher European yields as a Fed rate hike is looming.

Key Quotes

“Instead, the EUR could strengthen further versus currencies such as the British pound (GBP) which are backed by easing central banks. On Sunday, UK Prime Minister May said that she will trigger Article 50 before March 2017 and implied that we might be heading for a ‘hard Brexit’ as control of immigration among other things will be more important than the UK’s access to the single market. This has been followed up by hardened rhetoric from German Chancellor Merkel and French President Hollande signalling that the UK cannot at the same time control immigration from the EU while having full access to the EU’s single market.

Last week, we saw the culmination of the GBP sell-off, with GBP/USD within minutes dropping sharply from around 1.26 to a 31-year low at 1.1841 and thereafter rebounding back to around the 1.23 level, where the cross is still trading. The violent price actions appear to have been driven by a flash crash in algorithmic trading in a thin market. We expect GBP to stabilise short-term but weaken further medium-term.”