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Near-term, economists at Danske Bank expect a repricing of the Brexit risk premium ahead of the 1 July deadline to send EUR/GBP higher again but they still expect parties to reach a deal, which would send EUR/GBP down again. 

Key quotes

“The UK has said that if there is no breakthrough this summer, it will begin planning for ‘no deal’ as a base case. Crucially, despite the COVID-19 outbreak and no breakthrough, we do not believe the UK will ask for an extension of the transition period. The lack of progress will mean investors start to reprice a higher probability of no deal, leading to a weaker GBP.” 

“There have been increasing discussions within the BoE about cutting the Bank Rate down to negative territory but given the size of the financial industry and signs the UK economy is recovering, we do not expect the BoE to cut to negative, although the option remains available. Instead, we believe the BoE will increase its QE programme.”

“We forecast 0.90 in 1-3M but believe EUR/GBP could test the 0.92 level in this period. When a permanent agreement is in sight, we believe EUR/GBP will move lower again, as investors will price out the Brexit premium. We target 0.86 in 12M.”