EUR/GBP seen at 0.90 in 3-month – Danske Bank

Senior Analyst at Danske Bank Morten Helt sees the European cross edging towards the 0.90 area in the near term.

Key Quotes

“We expect EUR/GBP to continue to trade higher in the coming 3-6 months”.

“Our bearish view on GBP is not just a story of monetary policy easing in the UK, but the case for a weaker GBP is also very much a macroeconomic story about an adjustment of a large current account (CA) imbalance”.

“We think that the substantial CA deficit of around 5% of GDP in the UK combined with high uncertainty about near-term FDI and portfolio flows into the UK, imply a sharp fall in domestic demand and a weaker GBP to support exports”.

“Both our MEVA and PPP models suggest that with EUR/GBP at 0.93 GBP would be significantly undervalued with a 2 sigma deviation from fair value estimates of 0.769 and 0.780 (MEVA and PPP, respectively). We think EUR/GBP is likely to overshoot this level for a period of time (this was also the case in 2008-2010)”.

“We have thus lifted our 3-12MM forecast targeting EUR/GBP at 0.90 (0.88) in 3M, and 0.95 (0.90) in 6M. Longer-term, we still expect the GBP will stabilise to some extent given attractive valuations. We target EUR/GBP at 0.90 (0.88) in 12M”.