EUR/GBP: From COVID-19 to Brexit talks – Danske Bank

Analysts at Danske Bank point out that after the sharp slide of the pound during March when the Bank of England cut rates, a late response of the United Kingdom government to the coronavirus outbreak and financial street, GBP have performed well in April so far amid an improvement in market sentiment. They warn that looming Brexit/trade talks mean renewed uncertainty in a three to six months period. 

Key Quotes: 

“The UK saw a somewhat hesitant closedown of the economy in wake of corona, but will clearly - alongside most other countries - take a very hard hit on growth this year. While the UK may be approaching the peak in virus figures, an exit strategy for how to open up the economy is still missing. This could prolong the economic pain near term.”

“Brexit uncertainty still lingers as the task of the EU and the UK landing a permanent trade agreement remains an unresolved issue. Thus, a new blow to confidence could be dealt from Brexit woes resurfacing. Indeed, the pandemic means both the EU and the UK have been preoccupied with issues other than Brexit trade agreement talks; this increases the risk of a big negative UK trade shock in 2021.”

“Albeit GBP has recovered somewhat as the fire sale of risk assets waned, it is difficult to see what can support GBP much further from here. And, we probably need to get rather close to the year-end deadline before a trade deal is landed. We see EUR/GBP at 0.90 in 3M and 6M followed by a move towards 0.86 based upon the assumption of a trade deal in 12M.”