EUR/GBP: Forecast at 0.875 on 1-12 month horizon – Danske Bank

Macroeconomic data weakened further in the United Kingdom and political uncertainty will likely continue to weigh on the economy, explained analysts at Danske Bank. They expect the Bank of England (BoE) to deliver a cut in January to support demand and expect a mild weakening in the pound. 

Key Quotes: 

“With the Brexit process sidelined ahead of the December general election, focus is now moving towards economic fundamentals. Growth is running at 1.0% and has come down in recent years. Private consumption is still growing at a decent pace and real wage growth is fine as well. However, recently we have become a bit concerned about developments in the labour market. While companies have continued hiring people until now despite Brexit uncertainty and the investment recession, the latest two jobs reports showed weak employment – and soft indicators suggest this trend may continue. If this is the beginning of a new trend, it may put further pressure on sterling.”

“We expect the Bank of England to deliver a 25bp cut at its meeting in January 2020, taking the Bank Rate to 0.50%. This forecast does not depend on the election outcome, although we believe a cut would be more likely in the event of a hung parliament than otherwise.”

“We forecast EUR/GBP at 0.875 on 1-12 month horizon. In a big picture setting, we expect EUR/GBP to trade 0.85-0.90. Importantly, the reason why we are not more optimistic is that Brexit risk has been replaced by downside economic risk, in our view. On the other hand, if UK demand comes back in force after a deal has been struck (possibly by late 2020), sterling could strengthen more than expected.”