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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.”