Pound Sterling Forecasts vs. Euro Raised by Danske Bank Following BoE Meeting

Above: Traders at Danske Bank (C) Danske Bank.

A forecast update from the team at Danske Bank: analysts have nudged their GBP/EUR forecast targets higher following the Bank of England's February policy event.

The move is in line with a number of pro-Sterling shifts in strategy being seen at other institutions, indeed this morning we report strategists at TD Securities have recommended trader go 'long' on the Pound-to-Euro exchange rate.

Danske Bank have altered their forecasts in anticipation of a stronger Pound having gone into the BoE event wrong-footed, we reported ahead of the event that Danske Bank analysts were actually expecting a negative outcome for the Pound.

The stance adopted going into the event confirms how uncertain markets and economists were regarding the thinking at the Bank of England.

In the event, the Pound rose against the Euro with the EUR/GBP falling to a low of 0.8731 and GBP/EUR hitting a best of 1.1449. Driving a rise in Sterling was the warning from the Bank of England that they will have to rise rates at a faster rate than previously assumed.

"Based on the hawkish signal from the BoE, we now expect the bank to hike the Bank Rate to 0.75% as early as May (previously February 2019). As this seems like the beginning of a hiking cycle, the BoE is likely to hike again in November," says Mikael Olai Milhøj, Senior analyst with Danske Bank.

Markets are now pricing a ~70% chance of a May interest rate rise having priced a ~50% chance heading into the BoE event.

Milhøj does take a slightly different stance saying in the short term his team see little room for higher rates "but believe the curve will steepen substantially further out" which implies a number of interest rate rises in latter months.

"This has strengthened the case for a lower EUR/GBP," says Milhøj.

Danske now expect EUR/GBP at 0.87 in 3M (previously 0.88), 0.86 in 6M (0.87) and 0.84 in 12M (0.86).

"Brexit remains a key driver for GBP, but the currency is likely to be more sensitive to UK data," says Milhøj.

A Euro-to-Pound exchange rate at 0.87 gives us a Pound-to-Euro exchange rate at 1.15, 0.86 gives us 1.16 and 0.84 gives us 1.19.

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Sterling Comes Under Pressure as Brexit Risks Emerge Once More

Pound Sterling went from hero to zero in the space of 24 hours with the currency shedding the gains realised in the wake of the Bank of England policy meeting on the back of a ratcheting up of Brexit tensions. Sterling fell during a press briefing on Brexit negotiations conducted by the European Union's Michel Barnier in which the tone was judged by markets to be negative.

Any hope that we would move away knee-jerk market reactions to Barnier's every breath - as was the case during 2017 - appears to be misplaced.

Barnier told assembled journalists in Brussels that a transitional Brexit period "is not a given".

Above: Michel Barnier's demands on the Irish border question have apparently hardened. (C) European Commission.

"Appears Mr Barnier is voicing concerns over the Brexit transition & the Irish border. The Pound is pushing lower as the pendulum shifts from a soft to a hard brexit. Some suggest a soft Brexit is indeed dead, leaving a hard or a very hard option. The Pound should continue to trade lower on the crosses," says Neil Jones, an analyst with Mizuho Bank Ltd.

Barnier cited the Irish border as an issue once more with the EU gunning for full alignment in EU regulations between Northern Ireland and Ireland.

In short, Northern Ireland is expected to remain in the single-market, which in turn creates a border within the UK; you can be assured the UK government nor the Northern Irealnd's largest party the DUP will not accept the splitting of the UK.

It appears those issues which were apparently agreed upon in late 2017 were perhaps not agreed upon at all.

The worst possible scenario for the British Pound pertaining to Brexit is that whereby the EU and UK separate abruptly in the event of no transitional deal being agreed. If no transitional deal can be agreed, you can bet your bottom penny that no trade deal will be agreed which opens the door to the trading relationship between the two jurisdictions defaulting to WTO rules.

Indeed, it is the chaos that an abrupt Brexit presents that is most disconcerting to businesses, and by extension the UK currency which was the second-worst major currency of the week.

At the weekend, the Pound-to-Dollar exchange rate is at 1.3830 having opened Friday at 1.3935, the Pound-to-Euro exchange rate is at 1.1290, having opened at 1.1364.

“The losses against the Euro are even more pronounced. With Brexit once again moving back onto the markets’ radar, risk of a sterling downturn has returned and even the Bank of England’s aggressive policy outlook hasn’t provided much support to the pound. It will be interesting to see how the markets respond to the EU summit towards the end of the month, and any news that leaks from it,” says Hamish Muress at brokers OFX.

Sterling bulls will nevertheless be feeling particularly hard done by considering how well the Thursday, February 8 Bank of England went. Note though that at the time BoE Governor Mark Carney did say the next interest rate rise at the Bank of England was contingent on progress being made in Brexit negotiations. 

So markets might feel justified in dropping the Carney 'put' for the Barnier 'call'.

Pound Sterling was one of the best performing G10 currencies in 2017 as it successfully "climbed a wall of worries" concerning the U.K. economy's ability to withstand concerns surrounding Brexit.

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