EUR/GBP: To move to 0.86 or toward parity on a 6M view - Rabobank

Earlier today, employment data from the United Kingdom showed upbeat number. Analysts at Rabobank point out that the political uncertainty limits the case for a rate hike at the Bank of England. They warn EUR/GBP could hit parity in the case of a “no deal” Brexit.

Key Quotes: 

“This morning’s release of the latest UK labour report was undeniably good news. Not only did the unemployment rate remain at 4%, which is the lowest level since the mid-1970s, but there was another tick higher in wage inflation. The data strengthens the perception that if it was not for political uncertainty there would be a strong case for the BoE to hike interest rates again before the end of this year.”

“We continue to forecast a move to EUR/GBP 0.86 on a 6 month view. This assumes a trade deal will be signed in time for the Brexit start date in March 2019, but that a fair amount of political uncertainty will be kicked down the road.”

“The better tone of UK average weekly earnings (at 2.7% 3m y/y in August), vindicates the outlook of the Bank of England. For some time the MPC have been warning that the tightening of the labour market will result in a step higher in wage inflation.”

“While better than expected UK economic data are clearly capable of triggering a round of shortcovering in GBP, they are unlikely to take precedence over political issues in the current environment. In line with our view, it appears that the consensus of market forecasters remains that a trade deal will be agreed between the UK and the EU before the start of Brexit next March.”

“If by the end of November the outline of trade deal is still not in place, it is possible that the consensus of forecasters will start to shift towards a ‘no deal’ outcome. This has the potential to trigger another wave of selling in GBP. Although our central view is for a move towards EUR/GBP 0.86 on a 6 month view, we see scope for a sharp moves towards parity on a ‘no deal’ Brexit.”