EUR/GBP risks to the upside ahead of EU referendum - Danske

According to analysts from Danske Bank, the EU referendum is a significant event risk for the pound and the Bank of England could be forced to act in case of Brexit. Their outlook for EUR/GBP depends on the outcome of the referendum.

Key Quotes:

“The upcoming EU referendum represents a significant event risk to GBP and poses a medium- to long-term risk. We target EUR/GBP at 0.80 in 1M, 0.76 in 3M, 0.74 in 6M and 0.75 in 12M.

“The first estimate of Q1 GDP growth showed that growth slowed to 0.4% q/q in Q1 16 from 0.6% q/q in Q4 15. This was the slowest growth pace since Q4 12. Moreover, the labour market report for February showed the first fall in employment since May 2015. In our view, slower growth and falling employment indicate Brexit uncertainties have hit the economy.”

“In the event of a Brexit, economic uncertainties would increase and the UK would be likely to fall into recession in H2 16, which could force the BoE to ease monetary policy. Mark Carney has explicitly said that the BoE’s first response would be to cut interest rates. A renewed round of QE cannot be ruled out in this scenario.”

“Given the high uncertainty surrounding the EU referendum, we see risks skewed to the upside for EUR/GBP ahead of 23 June. We forecast EUR/GBP at 0.80 in 1M and think it may inch even higher ahead of the referendum day. Longer term, the outlook for EUR/GBP very much depends on the outcome of the EU referendum. We assume a status quo for the UK, meaning that people vote to remain in the EU. This implies that the GBP appreciates immediately after the referendum.”

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