EUR/GBP: new target at 0.91 - Danske Bank

Analysts from Danske Bank, lift the EUR/GBP target for 1-3 months on the back of  Bank of England repricing and a stronger Euro. 

Key Quotes: 

“EUR/GBP rose sharply and broke above 0.90 on the announcement as expected given the dovish twist from the BoE. UK yields traded some 4-5bp higher across the 2-10Y segment of curve, while the very front end of the UK money market curve was little changed. The market now implicitly indicates around 35% probability (8.5bp priced) of a November rate hike compared to 9.5bp priced prior to the BoE announcement.”

“Over the coming 1-3 months, we expect EUR/GBP to test higher levels on the back of a strong EUR and BoE repricing. A 5bp decline in 2Y UK yields due to a further postponement of market expectations for the first BoE rate hike, will (everything else being equal) push EUR/GBP 0.1-0.25% higher, according to our models.”

“We lift our 1M and 3M EUR/GBP targets to 0.91 (previously 0.88) expecting the cross trade within a narrow range of 0.90-0.92. Over 3-12M, we continue to see some stabilisation in GBP, expecting EUR/GBP to drift back below 0.90 on the back of potential for some clarification regarding Brexit negotiations and valuations. However, as relative growth and relative monetary policy is expected to remain EUR/GBP supportive in the medium term, we see only modest downside potential in the year ahead. We target 0.90 in 6M (previously 0.88) and 0.88 in 12M.”

“Given the high political uncertainty due to the British government’s weak parliamentary majority, we expect EUR/GBP to remain volatile and we generally recommend investors and corporates hedging GBP assets/income to maintain a high hedge ratio.”