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UK virus concerns and a bounce in the EUR recently brought EUR/GBP to the highest level since early March. Nevertheless, economists at Danske Bank still expect a stronger pound despite the bump.

UK economy to outperform the euro-area this year

“The UK is gradually reopening supported by fast vaccinations, which, combined with businesses getting used to the new EU-UK trading relationship, means that the outlook for the UK economy looks much brighter. We expect the UK economy will outperform the euro area this year.”    

“EU-UK trade recovered in February after a sharp drop in January although trade is not all the way back to more normal levels. Overall, we think Brexit as a theme has moved into the background now, but keep an eye on the EU-UK negotiations on the implementation of the Northern Ireland protocol.”  

“We have seen a significant repricing of the Bank of England (BoE) in Q1. It is not long ago a negative BoE Bank Rate was a theme, but now the first 15bp rate hike is priced already in November 2022, which would take the Bank Rate back to 0.25%. We think this is slightly to the aggressive side, as we do not expect any hikes through 2022, at the moment. Eventually, the BoE is likely to tighten monetary policy earlier than the ECB.”

“We think the recent EUR/GBP increase closer to 0.87 is a bump in the road and remain bullish on GBP, as we are still more upbeat on the UK than on the euro area. Near-term, we expect EUR/GBP to trade around the current levels before the cross starts to move lower again. We still forecast EUR/GBP will trade at 0.83 in 12M.”