EUR/GBP to plunge towards 0.84 by year-end – UBS

Economists at UBS believe EUR/GBP is set to march downward in the coming months due to Britain's upbeat vaccination campaign and, therefore, have downgraded their forecast for the pair.

Clear divergence in growth prospects between the UK and euro area

“In the next two quarters EUR/GBP may find support: Remaining uncertainty around EU-UK trade relations may stabilize the pair at around 0.83, while with synchronized global growth later on EUR/GBP may even test the 0.80 level. On the other side, we expect 0.90 to provide hard upside resistance.” 

“One risk factor is that UK economic growth could slow more than is currently forecast, forcing a stronger reaction from policymakers. Worsening COVID-19 dynamics could further heighten risk aversion and lift EUR/GBP.”

“Over the medium to longer-term, GBP is likely to outperform EUR. Diverging paths on the economy and the language of central banks are still likely to favor sterling against the euro in the coming few months. Longer-term, the Bank of England will continue to have less of a problem achieving its inflation target than the European Central Bank  will.” 

“We have recently lowered our end June and September EUR/GBP forecasts to 0.85 (0.88) and our year-end target to 0.84 (0.87). In addition, our 1Q22 forecast has been cut to 0.83 (0.87).”

“The success of the vaccination program in the UK puts it on track to emerge from the pandemic restrictions in the coming months. In the EU, there may be a slight delay to the recovery although it won't be derailed.”