The pre-Christmas trade deal between the UK and the EU failed to give the pound much of a lift. EUR/GBP is trading back above the 0.900 area this week but economists at Rabobank forecast the pair at 0.87 by end-2021.
Key quotes
“While the UK’s relatively rapid roll-out of its vaccine programme is allowing optimism for H2 to persist, headlines surrounding the risk of a ‘double-dip’ recession have been appearing in reference to the souring of the outlook for the early months of this year. The market is also pricing in an increased risk of a 10 bp rate cut from the BoE later this year, though we may have to wait for the Bank’s next policy meeting on February 4 for further policy clues.”
“In addition to economic hurdles, politics also has the potential to weigh on the GBP this year. Brexit is unlikely to stray far from the headlines as commentators attempt to evaluate the initial impact on the economy and as discussions around aspects related to issues such as equivalence for financial services persist.”
“The Scottish parliamentary election is due to take place in May. Polls suggest that Sturgeon’s Scottish National party could be the biggest party in Holyrood after the election and it is expected that its manifesto will be calling for a second referendum on independence. In 2016 Scotland voted in favour of staying in the EU.”
“Our central view is that the pound can make up some ground vs the EUR in the latter part of the year in line with an expected rebound in UK growth. However, the coming months could still bring plenty of hurdles for the pound. Our end of year forecast is EUR/GBP 0.87.”
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