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Jane Foley, Senior FX Strategist at Rabobank, notes that the GBP dipped below the USD/GBP1.30 level this morning on the back of broad-based USD strength but it has been largely holding its ground vs. the embattled EUR.

Key Quotes

“Yesterday’s better than expected UK manufacturing PMI release may have provided some comfort for the pound.”

“Yesterday there was a short-lived but sharp reaction in the pound to a headline that PM May was preparing to make a significant compromise to the EU regarding to N. Ireland border issue in an attempt to sooth the path for a deal. UK Brexit Secretary Raab later brushed off the news as speculation but the headline will still likely encourage speculation that the UK could remain in the customs union, albeit temporarily, until an alternative solution is found.”

“Given that Labour supports a customs union and so do some Tories, there is the possibility that May could find sufficient parliamentary support for such a plan.   Given that it would clear away some of the currently political uncertainty, such an outcome would be positive for the pound.”

“It remains our central view that a compromise will be found between the UK and the EU ahead of Brexit. This outcome would be supportive for the pound medium-term, although the likelihood that some uncertainty will be kicked into next year will limit upside potential.   Given that the outcome for the EUR is currently being clouded by Italian budgetary concerns and by fears that the populist wave could extend these pressures into other parts of the region, the EUR’s outlook is dimmed.   We expect EUR/GBP to trade moderately lower near 0.87 on a 6 month view.”