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EUR/GBP and Brexit: scenarios - Danske

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 24, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    According to analysts from Danske Bank, volatility in the EUR/GBP pair is likely to remain high ahead of the Brexit referendum; they expect that people vote to remain in the EU that should strengthen the pound.

    Key Quotes:

    “Given the high uncertainty surrounding the EU referendum, we see risks skewed to the upside for EUR/GBP ahead of 23 June. A substantial Brexit risk premium has already been priced into the FX option market, and further significant GBP selling pressure is not likely to be seen before we come closer to the referendum. However, volatility is likely to remain high and EUR/GBP is likely to be very sensitive to news flows. In our main scenario, we assume that people vote to remain in the EU. This implies that GBP should appreciate immediately after the referendum.”

    “If the UK votes to stay in the EU on 23 June, this risk premium would be priced out of the market right after the outcome of the referendum has become known. Thus, according to our risk premium estimates, a Yes would cause an immediate fall in EUR/GBP in the 0.7425-0.7660 range, with 0.75425 as the most likely outcome.”

    “Given the large uncertainty about the economic consequences of a Brexit scenario and the impact of a Brexit on investor confidence in the UK, the extent to which the usual drivers of EUR/GBP – such as the growth and monetary policy outlook and flows – will weigh on the GBP in the slightly longer term is also highly uncertain."

    “The confidence bands derived from our medium-term model and the PPP estimate imply that EUR/GBP as high as 0.90 (Brexit scenario) for a period of time would be stretched. However, 0.90 would be within the ‘norm’ and thus a level that could not be ruled out viewed from a fundamental perspective."
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