GBP/USD did manage to recover on hopes of a softer Brexit. The team at Morgan Stanley sees further gains and a sell opportunity:
Here is their view, courtesy of eFXnews:
GBP has seen its strongest gain since ‘hard Brexit’ fears gripped markets a couple of weeks ago. GBPUSD has potential to 1.2650, but investors may soon have to deal with increasing uncertainties again. Parliament still does not have the right to vote on triggering article 50 which is likely to happen in spring starting a two year period of intense negotiations between the UK and the EU. Investment uncertainties will remain high, not boding well for the supply side of the UK economy and suggesting the economy may enter an underperforming position within the G10.
Hence, GBPUSD near 1.2650 offers a selling opportunity targeting 1.15 which we think may be reached in Q1.
Our bearish GBPUSD call should be supported by the anticipated rise of the USD too. Overnight the US rates curve bull flattened, seeing markets reducing Fed rate hike probabilities for next year. By now, the consensus sees Fed funds rates rising by 18bps in 2017 marking a substantial difference to last year. In late 2015, rate expectations for 2016 rose progressively with markets pricing in the Fed hiking rate by 2.5 times 25bps. The result was a front-loaded USD rally peaking in January 2016 followed by a multi-month USD correction driven by the Fed actively reducing rate expectations. Nowadays, the situation seems diametrically opposed to how the market progressed last year, suggesting the anticipated USD rally may start slowly, but accelerate over the course of 2017.
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