EUR/GBP to be a function of Brexit uncertainty and monetary policy divergence - Nomura

FXStreet (Delhi) - Research Team at Nomura, believes that the tug-of-war between Brexit uncertainty and monetary policy divergence will be the key driver of EUR/GBP this year.

Key Quotes

“The rate spread has been stable recently, while Brexit uncertainty is now more in focus, as suggested by the uptrend in GBP/USD implied volatility. As a result, this tug-of-war is slightly GBP negative for now, which explains a part of GBP’s weakness, in addition to weak global risk sentiment. We estimate 25bp of rate spread widening can be offset by Brexit uncertainty, if the current level of uncertainty continues into the referendum.

Also, as we expect the referendum to be held in September, GBP performance in Q3 would be especially weak if the current level of uncertainty continues. GBP is also being negatively affected by the deterioration in global risk sentiment, and any market stability could support GBP outperformance again. Nonetheless, the latest developments in this tug-of-war suggest the pace of GBP appreciation against EUR will be slower than we previously expected.”