GBP set to recover on Brexit clarification – Danske Bank

In view of analysts at Danske Bank, the Brexit issue is set to remain the main driver for GBP in 2018 and while uncertainty and fundamentals justify an undervalued GBP for now, they see prospects of a recovery in 2018 as clarification on Brexit increases.

Key Quotes

“This should eventually bring investors back to GBP assets due to attractive valuations. On 14 December 2017, the EU leaders will decide whether sufficient progress has been made in the first phase of negotiations (‘the divorce’), so that negotiations can proceed to the second phase (the future relationship). While the first phase of the negotiations is important and necessary, what matters for GBP is the future EU-UK relationship and, not least, reassurance that it can avoid a ‘cliff-edge Brexit’, where there is no deal and no plan when the current 2Y negotiation window ends and the UK formally leaves the EU. An agreement on a transitional period would reduce the risk of a ‘cliff-edge’ scenario and clearly be GBP positive in our view.”

“EUR/GBP likely to fall below 0.85 on Brexit clarification

GBP is significantly undervalued according to our MEVA model, indicating GBP strength over the medium term. While the MEVA currently indicates 0.77 as fair value over the medium term, a Brexit-adjusted MEVA points to 0.83 as ‘fair’. In our view, it is likely the ‘true’ fair value is closer to 0.83 than to 0.77 but it all depends on the final deal between the EU and UK and the UK’s ability to establish trade agreements outside of the EU.”