EUR/GBP: Brexit to strength euro in the short-term – Danske Bank

Brexit uncertainties remain, and the Bank of England still looks set to cut rates in 2020. Economists at Danske Bank expect British pound weakness in the next months. 

Key quotes

“We do not think the renewed optimism will last long, as Brexit uncertainty remains high. At this point, we cannot rule out a no deal Brexit resulting from the EU and the UK failing to strike a permanent trade agreement by the end of the year. Despite the renewed optimism, we think businesses will remain hesitant to restart investment projects, and thus expect growth to remain sluggish in 2020.”

“We maintain a pessimistic view on the economic outlook and thus expect a rate cut later this year, probably in May. Investors are pricing in an 84% probability of a cut before year-end (and 35% by May). Another repricing of a BoE cut would be GBP negative.”

“In the very near term, we do not see many drivers moving GBP in either direction. As we get closer to the BoE meeting in May and the EU-UK trade talks’ decisions in June, we expect EUR/GBP to move higher on the back of a rate cut and Brexit fears. Eventually, our base case is a simple EU-UK trade agreement, which will strengthen GBP again. We forecast EUR/GBP at 0.85 in 1M, 0.86 in 3M, 0.89 in 6M and 0.84 in 12M.”