GBP/USD: Brexit risk-premium has eased but remains large – TDS

0

Sterling is looking perky amid signs that Brexit negotiations between the UK and EU could restart soon as the latest uptick in tensions is seen largely as political theatre. At the negotiating level, economists at TD Securities think both sides have largely identified the common “landing zones” and much of the future EU-UK trade relationship has been agreed by the two sides. “No-deal” risks remain, but the sterling already has a lot of bad news in its price. 

Key quotes

“Much of the future EU-UK trade relationship has been agreed by the two sides. We believe that around 90% of the trade agreement has been completed. Just a few key issues remain to be resolved. These are level playing field rules, governance, and fisheries. Progress has been made on the first two (largely with the UK ceding ground). Fish remains a highly-charged political lightning rod but is unlikely to sink a full EU-UK deal. A compromise here is highly likely, we think, but fish will be one of the last (if not the final) issue resolved.”

“Our base case remains that a deal will be reached. This view is not without its risks, however. The most significant of these, of course, would be a reversion to WTO Trading Arrangements on 1 Jan — the option favoured by many of the hardline Brexiteers. Even in this scenario a trade deal is (eventually) likely with the EU, but could take years rather than months.”

“We think the shock value of failing to reach a deal by the end of the year will see GBP weaken — and probably sharply at that. Here, we think a sudden and largely-unexpected no-deal outcome could be worth as much as a 5-7% drop in cable in the days immediately after the event. From current levels, for example, that would imply a spike down to the 1.20-1.23 zone. Interestingly, this is the neighborhood where we have seen cable bounce repeatedly since the referendum.”

Get the 5 most predictable currency pairs

About Author

Comments are closed.