EUR/GBP: There is still a case for a stronger pound – Danske Bank

Analysts from Danske Bank still believe the pound will strengthen in 2021. They forecast EUR/GBP at 0.89 in one month, 0.88 in three months and at 0.87 in six to twelve months. 

Key Quotes: 

“Near term, the economic outlook appears grim amid the third national lockdown and the new more infectious UK COVID-19 strain. However, the UK is vaccinating at a much faster pace than the rest of Europe, which, combined with the Brexit deal, means the UK may outperform the rest of Europe beyond Q1 21.”

“The EU and UK reached a permanent free trade agreement (covering mostly goods) on 24 December. While companies are struggling to fill out paperwork correctly, creating some friction at the borders currently, we believe the Brexit deal will eventually reduce the uncertainty that has been weighing on UK businesses in particular for many years now, once the near-term adjustment to the new relationship is over.”

“We are in the camp that believes the BoE will keep it unchanged at +0.1%, which means higher short-term gilt yields are likely to support the GBP.”

“While the Brexit deal did not send the GBP higher to the extent that we thought it would, we still believe GBP will strengthen in 2021, driven by a higher short-term interest rate spread, a faster COVID-19 vaccination process and much lower Brexit uncertainties. That said, we forecast EUR/GBP 0.89 in 1M, 0.88 in 3M and 0.87 in 6-12M.”