“The FX options market currently assigns just a 10% probability to GBP/$ hitting the 1.40 level before the end of the year. We can see why that is the case,” note ING analysts Chris Turner, Global Head of Strategy and Head of EMEA and LATAM Research, and Petr Krpata, CFA Chief EMEA FX and IR Strategist.
Key quotes
“The revised Brexit deal currently envisages the transition period ending in just over a year in December 2020. While that is likely to be extended, the current state of play means there is still a risk of the UK (outside of NI) abruptly exiting the single market and customs union.”
“That will keep businesses in the dark, and in turn, keep investment subdued. While Bank of England policymakers have attempted to reignite talks about possible policy tightening over recent days, we think this is unlikely to be forthcoming in the short-term.”
“As above, we see a Cable move to 1.40 being too much of a stretch this year – and if it were to happen it would probably involve us and the market massively under-estimating the size of the squeeze in short UK positions – those positions including equities, where fund managers have been underweight UK equities since 2014.”
“But at this point, the above factors are predominantly stories for next year, with the near term GBP price action evolving around: (a) the potential positive passage of the deal; and (b) possible amendments that can subsequently change the voting dynamics.”
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