EUR/GBP to remain volatile and range bound in coming months - Danske Bank

According to analysts from Danske Bank, Brexit is set to remain the key driver for GBP in the short term and they expect EUR/GBP to remain volatile and range bound in coming months. Longer term, they expect the combination of higher UK interest rates and Brexit clarification to gradually pave the way for a move lower in EUR/GBP.

Key Quotes: 

“Based on the hawkish signal the Bank of England (BoE) sent at its MPC meeting on 8 February, we expect the bank to hike the Bank Rate to 0.75% in May. As this seems as though the BoE is beginning a hiking cycle, we expect another BoE hike to follow in November, taking the Bank Rate to 1.00% by the end of the year. This is more hawkish than consensus and more hawkish than the market’s pricing.”

“The second round of Brexit negotiations has started and we expect Brexit to remain the key driver for GBP in the short term and expect EUR/GBP to remain volatile within the 0.865-0.895 range ahead of the EU summit on 22-23 March. We still believe that it is possible to reach agreement on a transition period at this summit, after which discussions on the future trade relationship should begin. In our main scenario, we expect a ‘decent Brexit’, where the future relationship will be something like CETA+ (CETA but more comprehensive on services and regulatory alignment in order to reduce non-trade barriers)."

“Longer term, we expect the combination of higher UK interest rates and Brexit clarification gradually to move GBP away from fundamentally undervalued levels. In particular, with the BoE now more firmly signalling a gradual hiking cycle, the case for a lower EUR/GBP has strengthened as we now expect the BoE to ‘out-tighten’ the ECB in the coming 12 months.”