Jane Foley, senior FX strategist at Rabobank, points out that some of the amendments to PM May’s Withdrawal bill that may be voted on by UK MPs tomorrow could result in a very significant alteration for the outlook for many UK businesses, the direction of the UK economy and possibly even the constitution.
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“The strong rise in the value of the pound over the past week or so suggests that investors have already gone a long way to pricing out the risk of a ‘no deal’ Brexit. Legislation now needs to follow suit. If it does not, the pound will be very exposed to the downside.”
“GBP is currently the best performing G10 currency in the year to date having risen around 3.1% vs. the USD. A decent proportion of this rally came last week as the market became more optimistic that a ‘no deal’ Brexit would be avoided. While it appears that the majority of UK lawmakers would favour the avoidance of a hard Brexit, this is the path the UK is currently steering towards. The amendments that will be debated and voted on in parliament this week will bring some clarity as to what happens next in terms of the Brexit debacle. The outcome of these votes should also make its clear if investors’ belief that a ‘no deal’ Brexit is off the table is justified.”
“For GBP the removal of the threat of ‘no deal’ is likely to bring most relief. This scenario would likely breath life back into both business and consumer confidence and potentially open up more upside potential for the pound. That said, none of the amendments would draw a line under Brexit uncertainty, which is set to continue in one form or another for the next couple of years. These uncertainties suggest that GBP is still faced with a rocky ride in the coming months.”
“Our central expectation remains that a soft Brexit is the most likely outcome for the UK. Based on this scenario our forecasts for EUR/GBP on a 3 and 6 mth view remain at 0.87 and 0.86 respectively. Dependent on what amendments are passed this week, there is scope for a relief rally in the pound. However, the realisation that a lot of Brexit related uncertainty will persist, should constrain the medium-term outlook for GBP.”
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