According to analysts from Danske Bank, the Pound remains fundamentally undervalued and they see that in terms of capital flows, foreign investors’ appetite for UK assets may rebound in the case of Brexit clarifications.
Key Quotes:
“Theresa May is stepping down as PM and the Conservative party is in search of a new leader. The near-term likelihood of a soft Brexit has hence declined and the GBP weakened on the back of it. We do not expect the likelihood of a hard Brexit will rise further and the risks are tilted for a somewhat stronger GBP (fading fear of hard Brexit)”.
“We do not view the political situation (yet) with the same severity as late last year, when the GBP was only slightly weaker than seen today. On this side of summer, we do not expect a convergence towards one of the (poundnegative) Brexit outcomes and hence expect very limited further weakness in GBP. Rather, from the current level, small changes in the perception of the possibility of a softer Brexit could cause a non-linear reaction in favour of GBP strength”
“The Bank of England does not seem in a hurry to raise rates in the current environment with UK leading indicators suggesting a small slowdown, inflation and wages under control, weakness in Europe and prolonged Brexit uncertainty. With other central banks on hold, we do not believe the Bank of England would want or need to push for stronger GBP, or higher rates. Hence, as of today, we see little support in a repricing via BoE.”
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