This chart shows the performance of EUR/GBP exchange rate in contrast to the performance of long-term yield divergence between 10-year German Bund and 10-year UK gilt.

• During our evaluation period beginning August 2015, we can see that long-term yield difference between the German bund and UK gilts are somewhat going hand in hand with the EUR/GBP exchange rate. While the yield spread topped in late August last year, the EUR/GBP exchange rate moved higher to peak in early October around 0.92 area.
• A very interesting point to note would be the divergence between the long term rates and EUR/GBP exchange rate. Since the British referendum last year, we can visually see that while the spread widened from 62 basis points to 119 basis points in favor of the UK, the pound initially weakened against the euro. As the spread narrowed since November last year, from 119 basis points to 77 basis points now, the exchange rate has been in a consolidation phase.
• The 20-day correlation between the spread and the exchange rate declined from a positive 93 percent in last August to just 25 percent as of our last review in June. It has been rising since and currently at 44.5 percent.
• Since our last review, the yield spread has narrowed by 11 basis points in favor of the euro and the euro has increased by 150 pips against the pound.

It is clear that other fundamentals are exerting much more impact on the pair than simple rate divergence, which is not surprising given the impact of Brexit on the future of the UK.

What might affect the yield spread significantly going forward?

• Political uncertainties in relation to the current minority government
• The outlook from both the Bank of England and the European Central Bank. Some policymakers have turned hawkish at BoE, which would have a significant impact going forward.
• Inflationary outlook in the United Kingdom due to a weaker pound.
• Brexit negotiations
  

The euro is currently trading at 0.892 against the pound.