Volatility is expected to increase around EUR/GBP – Danske Bank

Senior Analyst at Danske Bank Morten Helt assessed the prospects for the Sterling, the BoE and EUR/GBP in the next months.

Key Quotes

“EUR/GBP bounced a bit overnight as BoE governor Mark Carney’s speech was interpreted as slightly dovish although he did signal that a rate hike is warranted”.

“The market is currently pricing in an accumulated 19bp rate hike from the BoE in November, suggesting that there should still be some GBP appreciation potential in store ahead of the next BoE meeting on 2 November. We expect the BoE to hike in November and look for EUR/GBP to decline towards 0.87 around the meeting”.

“Near-term risks are more balanced from a positioning point of view. Moreover, we note that political uncertainty related GBP is likely to increase in the coming weeks as Theresa May is scheduled to speak in Florence on Friday 22 September ‘to update on Brexit negotiations so far’. The speech will attract a lot of attention in the financial markets, as it was the main reason why this week’s Brexit negotiations was cancelled”.

“Furthermore, political uncertainty and Brexit concerns could also become a theme again in connection with the Conservative Party congress running from 1-4 October. Hence, while we are moderately bearish EUR/GBP in 1-3M, we stress that some GBP selling pressure driven by rising uncertainty is likely to emerge in coming weeks”.

“Finally, we stress that a November hike from the BoE is still conditioned on incoming labour market and inflation data. Hence, expect mo re two-way volatility in the coming months”.