EUR/GBP to move towards 0.86 on a Brexit agreement – Danske Bank

EUR/GBP is more or less solely in the hands of the Brexit-outcome. If we get a simple free-trade agreement, economists at Danske Bank expect to see a move towards 0.86. If we do not get a deal between the EU and UK, they expect EUR/GBP to jump markedly higher without breaching parity.

Key quotes

“In line with our expectation, negotiations have extended into November and we are still yet to see a Brexit agreement. We expect a deal in the second half of November but will be more concerned if there is no progress around 1 December, which we believe would weigh on GBP if this is the case.”

“We expect the Bank of England to keep policy rates unchanged throughout our forecast horizon despite increasing discussions about whether to cut into negative. In the event of no deal, we expect a significant cut to -0.5%.”  

“As our base case remains a simple free-trade agreement covering goods and that a deal will be finalised over the next two to three weeks, we expect EUR/GBP to move lower in the very near term, supported by the positive vaccine news favouring cyclical currencies. We forecast 0.86 in 1-12 months, which we believe will be the new trading midpoint in the coming year, although we believe risk is skewed towards it going lower than 0.86 in the very near-term in the event of a deal. If we are wrong and instead head for no deal, we believe EUR/GBP will move markedly higher (yet stay below parity).”