EUR/GBP: Pound remains fundamentally undervalued – Danske Bank

Analysts at Danske Bank forecast the EUR/GBP will trade at 0.90 in a three-month period. They explained that the United Kingdom runs a large current account deficit, which makes the pound vulnerable as capital flows faded at the height of the coronadriven risk sell-off. “While the imminent risk of more along these lines has faded, it keeps GBP at risk vs surplus-EUR in wake of a new wave of the virus.”

Key Quotes: 

“GBP remains fundamentally undervalued with a significant Brexit discount still attached. Our Brexit-corrected MEVA estimate for EUR/GBP is close to 0.83; PPP estimate around 0.76. Thus, if a trade deal with the EU is eventually sealed, a decent move lower should be in store.”

“The coronavirus initially proved to be a perfect storm for GBP, as BoE rate cuts, the UK’s handling of the spread of the virus and the sizeable current-account deficit weighed on GBP. Further, COVID-19 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. While 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. We probably need to get rather close to the year-end deadline before a trade deal is landed.”

“We see EUR/GBP at 0.88 in 1M, 0.90 in 3M (previously 0.93) and 6M (0.90) followed by a move towards 0.86 on a trade deal in 12M (0.87).”