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Analysts at Rabobank see the risks for a hard Brexit are rising but still assign a 50% probability to a trade deal being agreed. They see GBP rising on this outcome, but they warn that in the near term it could come under pressure as the markets weigh no deal risks.  

Key Quotes:  

“As a consequence of Brexit, GBP markets are faced with an unprecedented set of political risks. Layered on top of these is the uncertainty connected with the PM’s weak position and the potential that the next UK government could be more left-wing than any since the 1970s. From the perspective of a currency, a weak government is typically a negative factor. That said, a left leaning government can be a more significant concern in view of the connotations of less fiscal prudence and greater state inference in markets. Who governs the UK through to the next general election and after it could have a significant impact on the pound.”

“Although the risks for a hard Brexit are rising, we are still assigning a 50% probability to a trade deal being agreed. While we would expect GBP to rally on this outcome, in the nearterm we expect GBP to come under pressure as the markets weigh the rising risk of a no deal Brexit.”

“We are forecasting EUR/GBP at 0.90 on a one month view with upside risk if the prospects of a Brexit deal do not improve. Our 6 month forecast of EUR/GBP 0.86 assumes a Brexit deal will be done.”

“For GBP investors the risk of a hard Brexit followed by a Labour government is currently an unpalatable but tangible risk. For the pound either of these risks is negative, both would be extremely adverse. The coming week contains two very key UK events with the annual budget scheduled on Monday followed later in the week by the regular BoE policy meeting. Both are likely to be overshadowed by political uncertainty. The BoE will be keenly aware of the risks that are facing the pound and may be inclined to ratchet up some hawkish rhetoric to limit downside risk. Even so, sterling could currently be standing on very precarious ground.”