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Bill Diviney, senior economist at ABN AMRO, suggests that sterling has been very volatile this year and managed to recover back when investors feared a disorderly Brexit in August 2019 with excessive net-short speculative positions reducing well.

Key Quotes

“We think that sterling has room to recover further for the following reasons. First, the risk of a disorderly Brexit is now very low, but uncertainty about the upcoming elections still make investors somewhat cautious. In general, investors are cautious about important upcoming elections, but all likely outcomes of the election are benign for financial markets, with minimal risk of a disorderly Brexit. Speculators are still overall short sterling, and these trades will likely will be closed when the election uncertainty is over. Sterling has probably the most upside potential if parties supporting Remain/another referendum get a majority, but sterling will likely be more volatile because of the uncertain path to get to a Remain.”

“A Conservative majority will also be positive for sterling in the near-term as it reduces both political uncertainty and Brexit uncertainty in one go. However, towards the end of 2020 sterling will likely experience some weakness on the risk that the government does not extend the transition period. A Labour majority will likely lead to the smallest upside potential for sterling, as investor expectations on the implementation of Labour’s agenda will dampen the positive impact on sterling of a potential soft Brexit/Remain.”

“Second, the economy will perform relatively well (no recession) and a BoE rate cut is not in our base scenario. Third, from a technical point of view the longer-term outlook for sterling has become positive and this will continue to support sterling. Ahead of the Brexit referendum in June 2016 GBP/USD, was above 1.45.”

“Our economic outlook and BoE view are constructive for sterling, but not overly bullish. So, our new forecasts show some upside in sterling, but we don’t expect GBP/USD to rally above 1.45 on our forecast horizon. Our year-end forecasts for GBP/USD for 2019 and 2020 are 1.30 and 1.35 respectively.”