EUR/GBP: Brexit and BoE likely to weigh on the pound - Danske Bank

According to analysts from Danske Bank, a too optimistic Bank of England and continued Brexit uncertainties are likely to weigh on the pound. They have a target for EUR/GBP at 0.91 in 1M, 0.91 in 3M, 0.90 in 6M and 0.88 in 12M.

Key Quotes: 

“The UK economy has slowed substantially and while GDP growth in Q2 accelerated to 0.3% q/q from 0.2% q/q in Q1, GDP growth in H1 17 was the weakest since the European debt crisis. 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 at around 3% later this year. Additional uncertainty following the UK general election adds to the risk of slowing activity.”

“The BoE maintained the Bank Rate at 0.25% in August and kept the targets for government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively. The vote count for the Bank Rate was 6-2 against 5-3 last time, which was interpreted dovishly. In our view,  it underscores that a rate hike is not imminent and we still expect the BoE to remain on hold until Brexit negotiations are concluded in spring 2019. The main reasons are that we think the bank is still too optimistic on both wage growth and GDP growth and political uncertainty remains high due to Brexit.”

“The third round of Brexit negotiations is set to take place in Brussels between 28 August and 4 September. Previously, the EU’s chief negotiator Michel Barnier had said the negotiations were proceeding too slowly, meaning that negotiations in phase one (divorce bill, citizens’ rights and Irish border) may not be concluded in October as hoped.”