GBP: More weakness in store – Danske Bank

Research Team at Danske Bank, suggests that on a three- to six-month horizon, we think the substantial current account (CA) deficit of around 5% of GDP in the UK combined with high uncertainty about near-term FDI and portfolio flows into the UK, implies a sharp fall in domestic demand and a weaker GBP to support exports.

Key Quotes

“We forecast EUR/GBP at 0.88 in 3M, 0.90 in 6M. Longer term, we expect the GBP will stabilise to some extent given attractive valuations. With EUR/GBP at 0.90, both our Medium-Term Valuation Model (MEVA) and PPP models suggest the GBP would be significantly undervalued with a close to 2 sigma deviation from fair value estimates of 0.769 and 0.780 (MEVA and PPP, respectively). We target EUR/GBP at 0.88 in 12M.”