EUR/GBP: 6-2 vote could trigger a renewed test of the 0.90 level – Danske Bank

Analysts at Danske Bank note that EUR/GBP is trading at the high end of the 0.84-0.90 range and they still see it as the main trading range for the cross, but 6-2 vote in today’s BoE meeting could trigger a renewed test of the 0.90 level.

Key Quotes

“The recent leg higher in EUR/GBP has been driven mainly by general EUR appreciation, but June’s weaker-than-expected CPI figures from the UK also pushed the cross higher amid reduced expectations of a BoE rate hike in November.”

“The UK money market implicitly indicates around a 35% probability (9.5bp priced) of a November rate hike, while the timing of the first full 25bp rate hike has been pushed from July 2018 (as of 30 June) to December 2018. We still view the market’s pricing of the BoE as slightly hawkish as we see little prospects of a rate hike this year, and given the current momentum for the euro, we maintain a cautious stance on GBP near term.”

“If we are right that the MPC will vote 6-2 in favour of keeping interest rates unchanged at the August meeting, it is likely to be interpreted as a modestly dovish signal and could trigger a renewed test of the 0.90 level.”

“What matters for GBP longer term are the Brexit terms, and the ongoing Brexit negotiations will be a source of volatility in coming years. Any turning point for the British currency would probably have to be driven by reduced uncertainty about the future agreement between the UK and the EU, which could entice foreign investors back to Britain. However, given the British government’s weak parliamentary majority, we see little likelihood that skies will clear for GBP in the coming 12 months. Generally, we recommend investors and corporates hedging GBP assets/income to maintain a high hedge ratio.”