GBP/USD: Scope for volatility in the Pound remains heightened – Rabobank

According to analysts from Rabobank, movements in the Pound this week have mirrored the changing odds of a no-deal Brexit. They see that a no-deal Brexit may be off the table for now but warn a general election may be approaching and UK economic data are worsening.

Key Quotes:  

“At the start of this week GBP/USD was flirting with 3 year lows, but in the course of a few sessions the currency pair managed a dramatic turnaround. The performance of GBP this week closely mirrors the betting odds associated with the risk of a no deal Brexit at the end of the month. While these odds had surged into the end of last week, the actions of MPs in recent days have smothered the chances of a no-deal – at least for now. Even though GBP has become barometer of investor fears over a no-deal Brexit, there are other influences at play. The likelihood that there will be another general election in the UK in the coming months opens up another set of uncertainties for GBP investors. Additionally, poor UK economic data are providing another set of concerns.”

“On balance we expect that a Labour led coalition resulting from a general election should bring some support to the pound. By contrast a new Johnson led government would put the threat of a hard Brexit firmly back on the table. We would anticipate that this outcome would re-open downside potential for GBP. Given also the recent run of poor UK economic data and increased talk that the UK economy is facing a technical recession, GBP/USD would be at risk of dropping well below this week’s low in the 1.1959 area.”

“Scope for any subsequent recovery in GBP would likely be dictated by how chaotic the initial stages of a no-deal Brexit proved to be. This scenario could see cable being dragged towards the GBP/USD1.10 area. If a no-deal Brexit is ruled out by a new government we would expect EUR/GBP to clamber down towards 0.86 in 3 months, and for cable to rise to around GBP/USD 1.28.”