UK snap election not a catalyst for EUR/GBP – Danske Bank

The analysis team at Danske Bank explains that with the Conservatives in line to strengthen their position at the UK election in June, they expect the GBP to trade somewhat stronger.

Key Quotes

“We still see it range bound and Brexit risks are nowhere near gone. We target EUR/GBP at 0.84 in 1M, 0.84 in 3M, 0.83 in 6M and 0.83 in 12M.”

“The UK economy slowed substantially with GDP growth down from 0.7% q/q in Q4 to 0.3% q/q in Q1. The near-term growth outlook remains subdued as real wage growth has turned negative, implying less scope for private consumption growth, which among others is evident in the recent plunge in retail sales. CPI inflation rose to 2.7% y/y in April and is expected to move a bit higher in the coming months, peaking around 3% later this year.”

“The Bank of England (BoE) made no policy changes at its May meeting but maintained its hawkish twists, as Kristin Forbes (a known hawk) still voted for a hike and as the meeting summary stated that BoE thinks the current market pricing of BoE hikes is a bit too soft (market is currently pricing in an accumulated 20bp rate hike by the end of 2018). We still expect the BoE to remain on hold for the next 12 months, as we think it is unlikely the BoE will tighten monetary policy at a time of elevated political uncertainty.”

“We do not expect the UK election to be a significant driver for EUR/GBP and we expect the cross to mostly trade within the 0.84-0.85 range ahead of the UK election. In our main scenario that PM Theresa May consolidates power, the trading range for EUR/GBP should be in for a modest shift lower amid a reduction in tail risks of a ‘no deal Brexit’. The domestic outlook in the UK does not provide much relief for the GBP in the coming year: growth is set to slow and we expect the Bank of England to remain on hold for a long time irrespective of the outcome of the election.”