EUR/GBP: Budget of Italy’s new government has introduced downside risks - Rabobank

Analysts at Rabobank, forecast the EUR/GBP pair to reach 0.88 in 1M, 0.89 in 6M and 0.84 in 12M.

Key Quotes:

“Despite Brexit-related uncertainty and the ongoing debate regarding Bank of England policy, much of the price action in the GBP crosses recently has been reactionary. The month ahead brings both a BoE policy meeting and an EU summit at which the UK has promised to offer its latest vision of the post Brexit UK/EU economic relationship. Although GBP may steal back some of the limelight, the budget promises of Italy’s new government are set to re-shape the perceived risks associated with the EUR, which could dominate market focus over the summer. Even though Brexit-related uncertainty is GBP negative, upside potential for EUR/GBP may be limited if investors anticipate a defiant tone from Italy’s populist government. As a consequence we expect GBP/USD will be a better medium to express GBP negative views.”

“We estimate that in a ‘worst case scenario’ the government’s policies would need additional financing of between EUR100 bln and EUR152 bln a year. This equates to around 5.8% and 8.8% of GDP and is set against a backdrop of a huge debt pile in the region of 133% of GDP. A stand-off between the Italian government and Brussels on the budget thus looms. Given the risk that anti-EU sentiment could extend in Italy, this does not present a positive environment for the EUR.”

“It has been our view for a while that as the Brexit deadline nears, anxiety about a lack of clarity on the future trading arrangement between the UK and EU had the potential to weaken the pound and push EUR/GBP towards the 0.89 area by the autumn. The risk of a stand-off between Rome and Brussels on Italy’s budget brings in some downward risk to this forecasts. We have already revised lower our EUR/USD forecast to 1.12 from 1.15 on the back of Italian politics and we will be watching events closely in the coming weeks with respect to the outlook for EUR/GBP. For now we would favour expressing a negative GBP view vs. the USD. We see risk of GBP/USD reaching 1.28 by year end.”