GBP: Greater downside risks – Rabobank

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Jane Foley, senior FX strategist at Rabobank, suggests that as the market adjusts to the latest set of potential outcomes regarding Brexit, EUR/GBP has climbed around 3.5% from its lows in early May.

Key Quotes

“Despite the recent losses, GBP remains the second best performing G10 currency in the year to date after the CAD.  We have previous argued that the optimism built into the pound during the early months of this year can be linked with the consensus view that a Brexit deal between the UK and the EU was the most likely outcome.  In view of the current uncertain political backdrop, GBP now looks vulnerable and there is the possibility of a test of the 200 day sma at 0.8794 in the coming days.”

“The risks of a no deal Brexit could rise further if PM May is replaced by a Brexiteer as Tory party leader.  Not only does this possibility threaten to cloud the outlook for GBP in the months ahead but the devastating impact of Brexit on the UK political landscape could impact the outlook for GBP for years to come.”

“Although the chances of another referendum are still small, the fact that this is still an option being discussed in political circles will continue to give GBP some support.  That said, speculators appears to have been reducing net short GBP positions for most of the year.  As a consequence we see the downside risk for GBP as currently being greater.”

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