EUR/GBP expected to edge higher in the next months – Danske Bank

Senior Analyst at Danske Bank Jens Pedersen sees the European cross gathering further traction in the upcoming months largely due to GBP weakness.

Key Quotes

“EUR/GBP bounced 0.9% yesterday from 0.8900 to 0.8980 ahead of BoE Governor Mark Carney’s speech to the House of Lords Economic Affairs Committee. The move was probably driven by expectations of dovish comments from Carney”.

“In fact, Carney’s speech did not contain much news in terms of the monetary policy outlook. He said that the recent weakening of GBP was mainly due to the fact that the shape of Brexit has become clearer (the market is now pricing in some likelihood of a hard Brexit)”.

“The weakening of GBP will push inflation higher, but Carney once again signalled that the BoE will allow inflation to overshoot the BoE’s target for a period”.

“We still expect the BoE to cut the Bank Rate to 0.1% in Q1 17. This is not priced in by the market, and actually the market’s pricing of the future Bank Rate did not change yesterday”.

“Hence, in our view, price action in the FX markets is a reminder that 1) Brexit is first and foremost a theme for GBP, 2) markets will continue to remain nervous on this subject and 3) the risk for EUR/GBP is still skewed to the upside in the coming 6-12 months”.

“We target EUR/GBP at 0.92 in 6M but stress that there is a considerable risk that the cross could overshoot our forecast”.