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The pound has been trading higher over the last sessions fuelled by news of a COVID-19 vaccine and higher hopes of a Brexit deal. The FX Analysis Team at Rabobank, however, does not contemplate the euro extending below 0.8800 over the coming months.

Key quotes

“The pound is the best performing G10 currency on a 1-day view on the back of both Brexit related optimism and on the hope that the UK economy can benefit significantly from vaccination against Covid-19.  EUR/GBP is currently not trading far above the November low around 0.8861.  This area provided decent support both in June and in September, indicating that a break lower could pave the way for a move towards the 0.87 area.“

“That said, GBP still has a lot of hurdles to clear before investor confidence can increase another couple of notches and UK politics has the potential to sour the mood.  We are expecting that EUR/GBP will trade mostly in the 0.88/0.89 region in the coming months.”

“A skeleton trade deal between the EU and the UK appears to be priced in.  A skinny trade deal potentially focused on the manufacturing sector would be billed as a victory by both sides.  While this would not avoid confusion about paperwork or queues of trucks at the UK’s ports from January 1 onwards next year, it would make the Brexit transition easier for many firms.”

“There is scope for a relief rally in GBP on news that a deal has been signed, though the failure of the UK and EU to agree on a comprehensive deal will likely limit upside potential.” 

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