• GBP/EUR likely to gradually move higher towards 1.19 by 2016-end

    Source: FxWire Pro - Commentary / 15 Aug 2016 07:40:29   Eastern Standard Time

    The fall in GBP/EUR since the UK’s vote to leave the European Union is estimated to have left the sterling around 10 percent undervalued, noted Lloyds Bank in a research report.

    This divergence partially reflects the heightened political uncertainty and the connected rise in risk premia since the Brexit vote. While the currency pair pulled away from its recent low below 1.16, after the appointment of Theresa May as Prime Minister, the overarching uncertainty surrounding the domestic political outlook leaves GBP vulnerable to bouts of volatility, said Lloyds Bank.

    Nonetheless, the effect of Brexit on the remainder of Europe, given the upcoming elections in the year ahead, implies that the euro is also susceptible. Even if the Bank of England’s recently announced policy measures argue for a weaker GBP, the solid possibility of an extension to the European Central Bank’s QE program implies that the ECB’s balance sheet might keep on growing at a faster rate than that of the BoE.

    “Overall, we expect GBP/EUR to drift gradually higher towards 1.19 by year end, rising to 1.27 by the end of 2017,” added Lloyds Bank.