EUR/GBP: Brexit to keep pound undervalued and volatile for longer - Danske Bank

According to analysts from Danske Bank, the pound remains undervalued and is set to be volatile for longer. They see EUR/GBP at 0.90 in a 1-month period. 

Key Quotes: 

“The Bank of England (BoE) voted unanimously in November to keep the Bank Rate at 0.75%. We expect the BoE to hike around once a year and our base case is that the next hike will arrive in May 2019. However, Brexit clarifications dragging out and, not least, a softer outlook for global growth imply that the BoE could postpone the next hike to H2 19. The UK money market has priced the next hike to September 2020.”

“The GBP remains fundamentally undervalued. Our MEVA model puts EUR/GBP at 0.78 (our Brexit-corrected MEVA estimate for the cross is around 0.83), while our PPP estimate is 0.76. The main risk continues to be Brexit, which will keep GBP undervalued and volatile for longer.”

“As the 29 March Brexit deadline approaches, upside risks to EUR/GBP may dominate unless we get further clarifications. Longer term, we base our EUR/GBP FX forecast on our main scenario that Parliament will eventually approve May’s Brexit plan. We expect this to pave the way for a significant decline in EUR/GBP. We emphasise that the key risk to our bullish GBP view is that Brexit clarifications drag out – even beyond 30 March if Article 50 is extended – and that GBP appreciation will be moderate and materialise later than our forecast implies.” 

“We see EUR/GBP at 0.90 in 1M, 0.84 in 3M and 0.83 in 6-12M.”