EUR/GBP to tank to 0.86 in case of a Brexit deal – Danske Bank

Economists at Danske Bank now think it is 50/50 whether there will be a Brexit deal or not but an agreement seems unlikely before the new soft deadline on Sunday. EUR/GBP has moved higher, as investors have priced in a higher no-deal risk premium. In case of a deal, EUR/GBP is set to move significantly lower targeting 0.86. In the case of no deal, the cross will move to 0.97.

Key quotes

“We think a deal is unlikely before the Sunday deadline based on recent comments. […] We think it is now 50/50 (from 60% for a deal and 40% for no-deal previously) whether there will be a deal or not. At the end of the day, it is entirely up to Prime Minister Boris Johnson to make up his mind.”

“We want to emphasise that the no-deal scenario does not mean no deal forever. The EU and the UK can restart talks whenever they see fit. We would expect talks to resume within a year if there is no deal now.”

“Where EUR/GBP is heading depends on the outcome of Brexit. In case there is a deal, we expect the combination of investors pricing out the no-deal risk premium and more positive risk sentiment will send EUR/GBP lower, targeting 0.86 in three months. If there is no deal, we think the cross will move even higher, targeting 0.97.” 

“GBP may remain under heavy pressure near-term, especially if we are right that a deal will not be reached before the new soft deadline on Sunday.”