EUR/GBP won’t reach parity - ING

The euro has become a ‘political haven’ for currency markets and even with a multitude of political risks, the extent of GBP’s weakness is starting to look excessive, as shown by EUR/GBP, explains the analysis team at ING.

Key Quotes

“There is no UK specific risk premium for the GBP/USD as UK risks are offset by US uncertainty.”

“Political will suggests a Brexit disaster can be avoided

To get to parity against the euro, ‘hard Brexit’ risks would need to notch up another gear, this is unlikely as a movement to a ‘softer Brexit’ seems apparent and securing a transition deal should help ease any significant GBP downside bias.”

“Markets have adjusted to a wait-and-see BoE stance

Markets also see limited risks of a flatter UK rate curve. We believe a hard economic landing caused by weak consumer activity is unlikely, thus not decreasing short-run rates. Moreover, the EUR/GBP parity may not be in the economic interests of the BoE, and the ECB for that matter.”

“GBP is cheap, very cheap

We see GBP as extremely undervalued, with the stretched valuation likely putting a limit on the scale of a further downside.”