Analysts at ING suggest that with both retail sales and unemployment positively surprising – it wasn’t the worst week for UK data releases, but the lack of positive reaction in GBP markets is clear evidence the currency is infested with a double dose of risk premia.
Key Quotes
“(1) a UK-specific risk premium capturing the obvious heightened no-deal Brexit risks and (2) a global risk premium stemming from geopolitical uncertainties and EM turmoil. While we may already be at our GBP/USD 1.27 target, the persistence of these ‘twin risk premia’ could see us undershoot this level in the near-term with risks of a move down to 1.25-1.26.”
“However, we are slightly uncomfortable chasing GBP much lower now – especially in the absence of any tangible signs that we’re heading towards a no-deal Brexit. While the perceived odds of a no-deal are high – this may be partly due to political games and posturing.”
“We still feel the odds of an actual economic regime change (UK reverting to WTO trading rules) is much lower. The prospect of a last-minute deal on the Irish backstop means that risk-reward no longer favours pricing in no-deal Brexit risks – with scope for a sharp GBP rebound in this scenario outweighing further momentum driven moves lower.”
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