EUR/GBP: Brexit risk is increasingly being priced into Sterling – Danske Bank

The pound remains sensitive to the global risk environment argue analyst at Danske Banks. They add that Brexit uncertainty does not add support for the currency. They forecast EUR/GBP at 0.90 in 1-3 months, and moving back to 0.86 in 6 to 12 months, considering that a simple trade agreement between the UK and the European Union is reached before 2021. 

Key Quotes: 

“With the COVID-19 situation in the UK also improving, the UK government has started a very gradual easing of restrictions, though keeping social distancing rules. As the economy has not yet fully opened up and COVID-19 is not completely under control, the economy will remain fragile before, hopefully, we can see a more meaningful recovery in H2. Brexit is coming back onto the agenda with a ‘hard’ deadline on 31 December 2020, as the UK has now officially ruled out an extension. The continuing Brexit uncertainty will put a limit to how fast investments will recover in H2.”

“We expect the BoE to keep policy rates unchanged from here through our forecast horizon, despite increasing discussions whether to cut into negative.”

“The GBP remains caught in the middle of improving risk sentiment and Brexit uncertainty. We forecast EUR/GBP will trade around 0.90 in 1-3M and think the cross may go as high as 0.92. As our Brexit base case remains a simple free trade agreement covering goods late in the autumn, we forecast 0.86 in 6-12M.”