EUR/GBP: pound to weaken a lot further in coming quarters - Danske

According to analysts from Danske Bank the pound will weaken further in the next quarters based on Bank of England monetary policy and imbalances in the UK economy.

Key Quotes:

“GBP has weakened significantly since Britain voted to leave the EU on 23 June. However, in spite of the large increase in EUR/GBP  we expect GBP to weaken a lot further in coming quarters.”

“We expect the BoE to cut the Bank Rate by 15bp to 0.10% and to increase the Asset Purchase Facility (APF) for both Gilts and corporate bonds at the November meeting. The market is already pricing a 15bp rate cut to 0.1% for November, while the Bank Rate is priced to fall to 0.05% over the coming two years.”

“Our forecast of a weaker GBP is not only driven by BoE monetary easing. As mentioned, the markets have already priced in a more lenient UK monetary policy. Rather, our call that GBP is set to weaken further is based on the considerable imbalances in the UK economy; the huge current account deficit of no less than 6.4% of 2015 GDP is the highest of the G10 and higher than the deficits of several EM economies. In addition, the net foreign debt accumulated through several years of current account deficits has made GBP very fragile.Especially the large uncertainty surrounding flows and foreign direct investment, two of recent years’ absolutely essential supporting factors for GBP, would indicate further GBP weakening as a result of Brexit.”

“We expect EUR/GBP to increase to 0.95 on a 6M horizon. We base our call for a weaker GBP mainly on the considerable imbalances in the UK economy, as the country’s huge current account deficit and foreign debt point to GBP weakening further in the period ahead as a result of Brexit.”