By Samuel Indyk
Investing.com – Analysts at Commonwealth Bank of Australia (CBA) have recommended selling EUR/GBP at current levels with a stop loss at 0.8805 and a target of 0.8000.
EUR/GBP hit a high above 0.9000 in January but has since drifted mostly lower due to the strong vaccination programme in the UK and the EU/UK Brexit deal agreed at the end of 2020 that has lifted some uncertainty.
“In our view, EUR/GBP has plenty more room to drift lower,” CBA analysts said. “The starting point is EUR/GBP remains highly overvalued relative to the level implied by real interest rate differentials. Real EU‑UK 2 and 10‑year swap rate differentials are at levels indicative with EUR/GBP at around 0.7000.”
Headwinds for GBP
CBA does note that a potential headwind for GBP could come if there is another Scottish independence referendum. There appears to currently be elevated support for independence in Scotland with recent polls showing a relatively even split.
On 6th May, Scottish Parliament elections will be held, and they could be the springboard for another referendum should the Scottish National Party perform well. CBA does point out that any referendum on Scottish independence would need to be ratified by UK Parliament.
Despite this potential headwind, CBA are still constructive on GBP going forward.
“The projected faster recovery in UK economic activity compared the Eurozone suggests EU‑UK interest rate expectations can continue to adjust lower in favour of a weaker EUR/GBP,” CBA said.
"The consumer spending boost could be bigger in the UK than in the Eurozone if pent‑up savings is unleashed when economies fully reopen. UK households have accumulated more savings relative to disposable income than their Eurozone counterpart during the pandemic."