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Mikael Olai Milhøj, analyst at Danske Bank, points out Brexit remains the key driver of the pound. They expect uncertainty to keep the currency undervalued and volatile, awaiting some clarification.  

Key Quotes:  

“Brexit uncertainties and the slowdown in the rest of Europe continue to weigh on the UK economy. While GDP growth was strong in January, it was mostly a rebound after an extremely weak December. The PMIs suggest GDP growth may be as low as 0.0-0.1% q/q in Q1. Recently, we lowered our GDP forecasts to only 1% this year and 1.3% next year (from 1.2% and 1.4%, respectively). Another worrying sign is that the PMI employment sub-index is below 50, which is usually associated with falling employment.”

“Brexit remains the key driver for GBP and we expect uncertainty to keep GBP undervalued and volatile until we get some clarification.”

With a likely extension of Brexit, we think EUR/GBP will remain in the 0.85-0.87 range for now. We see a risk investors will be disappointed about the progress near term, which could lead EUR/GBP to move to the higher end of the range. We target 0.86 in 1M. Further out, we base our forecast on our base case that a deal will pass and that this could happen before the summer break, paving the way for a decline in EUR/GBP. We lower our targets to 0.83 (previously 0.84) in 3M and 0.82 (previously 0.83) in 6M on the back of the ECB’s dovish policy shift.”

If no deal is reached by then, we expect a long extension, which should also strengthen the GBP. In this scenario, we expect EUR/GBP to trade in the range 0.84-0.86. Our 12M target is unchanged at 0.83.”