EUR/GBP to soar to 0.97 on a no-deal Brexit scenario – Danske Bank

Brexit negotiations have continued over the summer and last week the negotiations ended without any major breakthrough. Economists at Danske Bank have lowered the odds of a deal to 60% from 65% while have lifted the probability of a no-deal to 40% from 35%. EUR/GBP will skyrocket to 0.97 on a no-deal scenario.

Key quotes

“We have lowered our probability of a deal from 65% to 60%. The reason is that the small probability of a deal over the summer did not happen. The probability of a comprehensive deal is slim (5%) and we expect a simple free-trade agreement covering goods (55%).”

“We now believe the probability of a no-deal Brexit is 40% (up from 35%). As the UK has rejected extending the transition period, the EU and the UK will trade on WTO terms on 1 January 2021 in the event of no deal. This also means that, in our view, businesses should continue preparing for the worst.”

“The next round of negotiations begins on 7 September and negotiating rounds are scheduled until 2 October, ahead of the EU summit on 15-16 October, where the ambition (hope?) is that EU leaders can say yes to an agreement. However, we believe that the two parts may need some 'overtime' and that an agreement is more likely in early November.”

“We believe EUR/GBP will continue to trade around 0.90, as it has done for some time now. If negotiations are on the brink of breaking down, we could see EUR/GBP moving higher to around 0.92. We believe GBP strength is on the cards when a deal is in sight and forecast EUR/GBP is 0.88 in three months and 0.86 in six-to twelve months.” 

“If we are wrong and there is no deal, we believe EUR/GBP will move significantly higher but stay below parity. We pencil in EUR/GBP at 0.97 in this scenario.”