Is EUR/GBP a parity trade?

While analysts are gravitating to parity forecasts in EUR/GBP, the research team of Global Rates & Currencies at Bank of America Merrill Lynch expect further GBP falls, but doubt that EUR/GBP will hit 1.00.

After a significant post-EU referendum depreciation, the market remains split on whether the bulk of the sell-off is behind us or whether the worst is yet to come.

Many of the Bank of America Merrill Lynch client interactions have increasingly focused on GBP/EUR against the backdrop of an increasing number of analysts calling for GBP/EUR to hit parity in 2017, but the firm’s analysts, led by FX strategist Kamal Sharma, suggest the misalignments that were exerting upward pressure on EUR/GBP earlier this year have largely corrected and in some cases suggest GBP is undervalued versus EUR.

“Indeed, we would go further and argue that EUR/GBP will struggle to maintain a handle above 0.90. In our view, selling top-side options in EUR/GBP is not attractive with volatility depressed. However, we would see any move toward 0.90 as an opportunity for the corporate (GBP buying) community to increase longer-term forward hedges,” Sharma said.

In addition, as the decision by the Bank of England (BoE) to reintroduce Quantitative Easing (QE) brings monetary policy closer into line with that of European Central Bank (ECB), and with the BoE reluctant to move rates into negative territory, rate spreads versus the ECB “should remain relatively stable”, Sharma said.


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