EUR/GBP is oversold – Danske Bank

EUR/GBP gained on Friday despite solid UK GDP data showing that the UK economy expanded 0.5% q/q in Q4 (slightly higher than the 0.4% expected), notes the research team at Danske Bank.

Key Quotes

“There are several important dates in the calendar for GBP this week: EU27 ministers will meet in Brussels to finalise Brexit directives on Monday, Mark Carney is due to speak before law makers on Tuesday and there will be the PMI manufacturing index on Thursday.”

“Brexit risk premium has declined substantially in recent weeks and while we still expect EUR/GBP to break lower eventually on Brexit clarification, it is still very early days of the second round of Brexit talks. Hence, we still see risks skewed to the upside near term amid stretched short-term valuation (Danske banks short-term financial model indicates that EUR/GBP is oversold, trading 1.5 standard deviation below the model’s fair value estimate of 0.8999) and positioning (speculative long GBP positioning is at its highest level since 2014).”