EUR/GBP has been in an uptrend since the middle of April, despite the fact that during this period the ECB has reiterated its guidance that rates “will remain at present levels at least through the summer of 2019″ and the BoE has hiked interest rates by 25 bps, points out Jane Foley, Senior FX Strategist at Rabobank.
Key Quotes
“It is clear that instead of interest rate spreads, politics has been the main driver of the pound – specifically the fear that the UK could crash out of the EU next March without a trade deal.”
“At the start of this month both BoE Governor Carney and UK Trade Minister Fox underpinned market concerns about a hard Brexit with their comments regarding the chances of no deal.”
“After Fox remarked that there is a 60% probability of no deal before the UK leaves the EU at the end of March 2019, cable hit an 11 month low. It can be argued that GBP was already on the back foot as the market digested that likelihood that, after its August 2 hike, the BoE was likely to stand pat on policy as Brexit neared.”
“Measured since the middle of April, the pound is currently the worst performing G10 currency. Whether or not the pound can slip further is likely to depend on whether the market’s faith in the ability of the government to secure a post Brexit trade deal with the EU.”
“This week’s Brexit talks brought the reassurance from UK Brexit negotiator Raab that a no deal Brexit was unlikely. That said, this morning he has released 25 of the government’s planning papers for a no deal.”
“Although EUR/GBP has been bias higher in the last couple of hours, there was no kneejerk reaction in the pound to this morning’s speech by Raab.”
“The September Labour Party conference is likely draw the attention of the market given speculation that certain factions could attempt to bolster Labour’s anti-Brexit standing. Both of these events have the potential to add volatility to the GBP.”
“It is our central view that EUR/GBP will edge lower on a three month view towards 0.88/0.87, though this assumes a trade deal is looking likely between the EU and UK. On a no deal Brexit, we would see scope for EUR/GBP to trade close to parity.”
Share
