EUR/GBP: Higher short-term, but to break lower 6-12M - Danske Bank

According to analysts from Danske Bank, the EUR/GBP is likely to move higher in the short-term. On the medium-term, they forecast the pair at 0.84 in 6M and 0.83 in 12M. 

Key Quotes: 

“With the BoE rate hike now most likely postponed until August, we see risks skewed moderately to the upside for EUR/GBP going into the BoE meeting on 10 May, and we raise our 1M and 3M forecast to 0.88 in 1M (previously 0.8650) and 0.8650 in 3M (previously 0.86).”

“Market expectations of future rate hikes are very modest, with only 15bp priced in for August (60% probability) while the first full 25bp hike is priced in by January 2019. Hence, if we right in our call of a ‘hawkish hold’ and an ensuing hike in August, relative rates should not be a significant driver for a higher EUR/GBP in the short term.”

“Our short financial model suggests that EUR/GBP might bounce 0.25-0.50 figures in case of a 10bp narrowing of the 2Y swap interest rate spread between the UK and the EU. Hence, EUR/GBP could temporarily break above 0.8850 and potentially test 0.89 before the meeting or on the announcement.”

“Longer term, Brexit still remains a key driver for GBP and while uncertainty remains high, we still expect EUR/GBP to eventually trade lower driven by Brexit clarifications and fundamental valuations. The turn in capital flows and FDI flows back into the UK, as indicated in the latest balance of payment data, suggests that a key headwind to GBP seen in Brexit is reversing, supporting the case for additional GBP appreciation over the medium term. We target EUR/GBP at 0.84 in 6M and 0.83 in 12M (0.84).”