EUR/GBP to move only modestly higher to 0.88 over the coming year – Danske Bank

Analysts at Danske Bank, de do not see the global investment environment nor the relative growth outlook creating significant divergence between the Euro and the Pound. They forecast the EUR/GBP pair to move only modestly higher to 0.88 over the coming year.

End to the hiking cycle, but not to the GBP headwinds

The Bank of England (BoE) decided to keep the Bank Rate unchanged at 5.25% at its September meeting after hiking the Bank Rate by a total of 515bp over the past meetings. We expect this to mark the peak in the Bank Rate. This is slightly below current market pricing, which is pricing a peak at 5.45%. On balance, we continue to see relative rates as a moderate positive for EUR/GBP, although GBP has been largely decoupled from moves in relative rates the past month.

Over the past month, EUR/GBP has moved to the upper part of recent months’ trading range of 0.85-0.87. On one hand, GBP has gained support from an overall USD-positive global investment environment and higher energy prices. On the other hand, a dovish BoE and lower than expected inflation have acted as a headwind.

We do not see the global investment environment nor the relative growth outlook create significant divergence between EUR and GBP. We expect the cross to move only modestly higher to 0.88 over the coming year.