Pound / Euro Rate this Christmas: Why Modest Gains are Likely

- GBP/EUR to respect established range during Xmas

- This suggests upside from current floor in the near-term

- More sizeable recovery possible in first quarter 2019

Pound Sterling is likely to trade doggedly within a range during the remainder of December and up until the meaningful vote in January, before eventually breaking out suggests analysis from Denmark's Danske Bank.

Analysis from the Copenhagen-based lender shows the EUR/GBP exchange rate is likely to range-trade between 0.8800 and 0.9050; the exchange rate is trading at 0.9015 at the time of writing.

The equivalent for GBP/EUR is a range of between 1.1050 and 1.1365 Pounds to the Euro; suggesting more upside potential from current levels which place it towards the floor of the range.

The sideways trend is likely to reflect uncertainty regarding the outcome of Brexit and the range is unlikely to expand until after the meaningful vote on the withdrawal deal in mid-January, which has been scheduled for sometime between January 14 and 21.

“While all options are still on the table in relation to the outcome of negotiations, uncertainty is expected to remain high in coming months as clarifications about Brexit drag on. Hence, we expect EUR/GBP to remain volatile and within its recent (wide) trading range near term,” says Jakob Ekholdt Christensen, chief analyst at Danske Bank.

The expectation of a sideways market over the next month dovetails with recent option market analysis which concludeds that sharp moves in GBP may be muted because of a decline in the premium of price of 1 month option contracts.

The cheapness of options suggests a lack of demand, and because options are mainly used to hedge currency risk, the situation is indicative of a lack of volatility over the next month.

The especially marked fall in demand for bearish options contracts or ‘puts’, as they are called is also evidence of a diminishing GBP bearish market opinion. This reflects a shift in probabilities away from a ‘no-deal’ brexit outcome, says Richard Pace, an analyst with Thomson Reuters.

The government is not thought to currently have enough votes to win the meaningful vote in January, nevertheless, Danske think that the most likely eventual type of Brexit will be of the more ‘benign’ variety, associated with a stronger Pound.

This informs their longer-term forecast for EUR/GBP to fall (or rise in the case of GBP/EUR) to 0.8700 in 3 months time, which is equivalent to 1.1485 GBP/EUR.

Beyond that, Danske’s Christensen sees even more downside for the Euro vs. the Pound longer-term:

“In our main scenario, we still expect a ‘decent’ Brexit and maintain our long-held view that EUR/GBP will break lower if/when the deal is passed by parliament. We target 0.83 in 6-12M.”

This is equivalent to 1.20 in GBP/EUR.

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