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Petr Krpata, chief EMEA FX and IR strategist at ING, suggests that despite the  rebound in the UK pound in the last few  weeks, the short term  sterling risk premium isn’t  extreme.

Key Quotes

“We estimate it to be worth around 2.5  % in EUR/GBP (vs 5% this August), with EUR/GBP still within its 1.5 standard deviation band as can be seen in figure 1. This means that  more risk premium  can be built into sterling.”

“The built-up of  speculative GBP/USD shorts  paused in recent weeks. Although elevated, they are  still below the 2017 extremes (33% of open interest currently vs 43% back then).  In the case of the rising probability of a no-deal Brexit and/or  early elections, the shorts can  rise further.”

“The recent decline of the pound over the last few days has turned  sterling into the  G10 FX underperformer yet again but we  don’t expect the Bank of England to provide any help  to the struggling pound,  with dovish market pricing to firmly remain in place. Currently, more than one full  25bp rate  cut is priced in within six months.”

“We view  early elections as negative for GBP and continue to see downside risks to sterling.  This is consistent with our forecast of EUR/GBP 0.95 within 1-3 months and  GBP/USD falling to 1.17.”