Analysts at ING suggest that not enough risk premium is priced in GBP until there is some clarity on a leadership challenge and there is a risk that we end up with a more Brexit-leaning leader.
Key Quotes
“Such an outcome would increase the chances of a No Deal, on the assumption that a new leader would be unlikely to secure any further concessions from Brussels. That is up for debate but would suggest a change in Conservative leadership – a scenario not in our baseline, nor likely in investors’ baselines either.”
“In determining how much risk premium is priced into GBP, we use a Financial Fair Value model (FFV), which looks at which financial variables have done a good job of explaining where EUR/GBP should be trading.”
“This morning we calculated that the risk premium was around zero – i.e. EUR/GBP was trading in line with short-term financial variables. But as recently as August, GBP traded with a 3-4% risk premium on the uncertainty around the Chequers deal and the Brexit supporting former Foreign Secretary Boris Johnson’s resignation.”
“In other words, were the market to price in a more credible leadership challenge, GBP could potentially fall another 3-4% – sending EUR/GBP back towards the 0.91 region and GBP/$ towards new lows for the year near 1.23/24. That’s the risk.”
Share
