Jakob Christensen, chief analyst at Danske Bank, points out that yesterday, EUR/GBP traded as elevated as 0.884 but the GBP reversed most of the day’s losses in late hours and view this spot level as warranted if one sees a high probability of either (1) a new election and/or (2) a no-deal Brexit realisation in the next one to two months.
“There are many potential quirks before this could happen and we hence we view the pricing as stretched for now. Put another way, 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 (pound-negative) Brexit outcomes and hence expect very limited further weakness in the 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.”
“A more pro-Brexit Conservative leader would probably increase the chances of a no deal scenario but the small majority in the House of Commons will likely continue to do as much as it can to avoid this, limiting a strong sell-off beyond knee-jerk reactions. Our base case is that a further Brexit extension beyond 31 October is likely.”