Danske Bank has released its latest FX forecast update following last week’s Federal Reserve interest rate decision, saying they are still bullish on
Danske Bank has released its latest FX forecast update following last week’s Federal Reserve interest rate decision, saying they are still bullish on GBP.
Last week, the UK government decided to delay the final stage of easing restrictions by four weeks to get more data on the spread of the ‘Delta variant’. However, Danske Bank still expects a strong economic recovery in the UK and they still see the UK outperforming the Eurozone this year.
Brexit & Monetary Policy
There was recovery in trade between the UK and EU in April and Danske thinks that, as a theme, Brexit has moved into the background now, although the negotiations on the Northern Ireland protocol are worth keeping an eye on.
In regards to monetary policy, the first interest rate hike from the Bank of England is priced in for August 2022 while the QE programme is still scheduled to finish by the end of the year.
“We do not expect any major changes at the meeting this week,” Danske Bank said. “Eventually, the BoE is likely to tighten monetary policy earlier than the ECB.”
On a valuation basis, the bank says GBP remains fundamentally undervalued although Brexit still makes it difficult to estimate what the fair value for GBP is.
Danske says they remain bullish on GBP as they are more upbeat on the UK than on the Euro Area. Separately, a more hawkish Fed and BoE should support GBP although the move lower in EUR/GBP is likely to be more gradual than seen at the beginning of 2021.
Nevertheless, they forecast EUR/GBP at 0.8400 on a 3-month horizon and 0.8300 in 12 months.
Risks to the forecast come from a hit to global risk sentiment, Bank of England maintaining QE into 2022 and tensions between the EU and UK.
The focus of the note was mainly the USD following the Fed interest rate decision. Their forecasts are generally little changed as the Fed’s pivot was in line with their general view.
Danske Bank’s EUR/USD forecast is largely unchanged and 1.1500 in 12 months is their main scenario.
The bank forecasts weakness for Scandi currencies with both EUR/NOK and EUR/SEK seen at 10.40 in 12 months’ time.