EUR/GBP: expected between 0.84-0.90, risks tilted to the downside - Danske Bank

According to analysts from Danske Bank, the pound is set to stay undervalued during Brexit talks. They target the EUR/GBP pair at 0.87 for the next 12 months. 

Key Quotes: 

“The UK economy has slowed substantially and incoming data has continued to surprise on the downside recently. The near-term growth outlook remains subdued as real wage growth has turned negative, implying less scope for private consumption growth. CPI inflation is running at relatively high levels and could peak around 3% later this year.”

“The BoE again delivered a hawkish surprise to the markets at its June meeting, as three members voted for an immediate hike and the phrase it can ‘move in either direction’ was removed from the meeting summary. Afterwards, both the BoE’s Chief Economist and Governor placed themselves in the hawkish camp, which is challenging our base case that the BoE will stay on hold throughout the Brexit negotiations.”

“The election outcome was in many ways the worst possible for GBP: a Tory-led minority government keeps a hard Brexit a reality but UK negotiation power vis-à-vis Brussels has been clearly impaired. We stress that the GBP is likely to stay in undervalued territory during Brexit talks but be highly sensitive to progress in discussions, and to a possible BoE shift in stance. We see EUR/GBP in the 0.84-0.90 range throughout our forecast horizon with risks tilted increasingly to the downside if BoE starts moving on tightening.”