EUR/GBP won’t reach parity -ING

As the pound gets an economic and Brexit reality check, analysts at ING explain why the 'Great British sell-off' in currency markets isn't here to stay.

Key Quotes

“GBP forecast update: Short-term pressure, gentler recovery

The pound has been an easy target for currency markets as the combination of a post-Brexit economic reality check and ongoing political anxiety has made the UK economy an outlier relative to its faster growing European peers. We believe this economic divergence story has largely run its course. In fact, GBP is beginning to show signs of idiosyncratic selling, similar to previous periods when domestic political risks have flared up.

We make two points here. First, this tends to be a short-run phenomenon, with GBP's material undervaluation acting as a limiting factor for sustained weakness. Second, and more importantly, we would need to see an additional layer of bad news to fuel any further politically-induced GBP selling. This seems unlikely in the absence of a Brexit disaster situation unfolding - that is a complete breakdown in UK-EU negotiations and renewed cliff-edge risks. Political will from both sides suggests the worst-case scenario will be avoided.

So while EUR/GBP has overshot our 0.90 forecast for 3Q17 - and admittedly quicker than we had anticipated - we cite four reasons for why we think a move towards parity looks unlikely at this stage. Our revised forecasts acknowledge GBP could remain under pressure ahead of key domestic and Brexit political risk events in October. But we view this as an overshoot of more fundamentally-justified levels, rather than a sustained trend in EUR/GBP towards parity.”