Brexit Tensions are increasing and may weigh on the British pound in coming months, warn analysts at Danske Bank. They also point out that relative interest rates have weighed on EUR/GBP for quite some time but not anymore.

Key Quotes: 

“It is still worth keeping an eye on the EU-UK negotiations on the implementation of the Northern Ireland protocol. Tensions are increasing, which may weigh on GBP in coming months.”

“EUR/GBP has been trending higher lately. Looking forward, on one hand, the positive USD environment is usually benefitting GBP relative to EUR. On the other hand, relative rates now seem supportive for EUR relative to GBP. Overall, we keep our 12M EUR/GBP target unchanged at 0.84 despite we are likely to see some support to the cross near-term.”

“A hit to global risk sentiment usually weakens GBP but if the war turns worse and/or the West imposes tougher sanctions on Russia, we are likely to see EUR/GBP moving somewhat lower again. EUR/GBP will move higher if ECB turns more hawkish. EU-UK tensions remain a risk.”