“It’s clear that a lot of bad news is priced into a pound plagued by twin sources of risk premia,” argue ING Bank analysts.
Key quotes
“But when it comes to Brexit and the currency, talks between the UK and the EU are not necessarily the primary short-term risk. In fact, some investors may have found comfort from the Raab-Barnier press conference over the past week – especially as it was clear that the EU isn’t actively looking to push the UK off any Brexit cliff edge (which makes sense given that a no-deal Brexit would be somewhat damaging to both economies). The inherent willingness of both sides to find a Withdrawal Deal solution should serve as a bit of a backstop to the degree of no-deal Brexit risks priced into the currency.”
“But when it comes to GBP and political risks, it is far too early to signal the all clear; the biggest test for the pound will be the return of a divided UK parliament from their summer recess and the upcoming Party Conference Season. A murky UK political backdrop may continue to put a dampener on GBP in the near-term – but as we noted last week, risk-reward may no longer favour chasing the pound much lower from these levels. We think GBP/USD at 1.27 (and EUR/GBP at 0.91) reflects a good chunk of Brexit negativity – and look for a stable, yet volatile, GBP. The week ahead sees UK money supply data (Thu) and consumer confidence (Fri).”
Share
