Political uncertainty associated with Brexit could knock GBP further – Rabobank

“Uncertainty appears to be one of the few certain elements of the Brexit process. In light of the sheer degree of political risk it is surprising that volatility in the pound has not been higher in recent weeks,” note Rabobank analysts.

Key quotes

“Although we see a strong chance of an August rate hike from the BoE, against the backdrop of a firm USD we still see risk of cable retreating below the 1.30 level by the end of the year. We continue to expect a moderate softening of the pound vs. the EUR towards EUR/GBP0.89 into year-end, but we have raised our 12 mth forecast to 0.87 from 0.84.”

“The MPC will be hoping that forthcoming UK economic data are sufficiently strong to allow it to pull the rate hike trigger this year and proceed along the path of policy normalisation. That said, the June guidance was not strong enough to reinvigorate comparisons of Governor Carney to an unreliable boyfriend if the Bank were to hold rates steady through the summer.”

 “While we are optimistic on the outlook for the greenback, we are less so on the EUR. Not only is the ECB dovish but the issue of immigration has brought far right populism and a threat to the status quo to a variety of EU countries. Within EMU, the new Italian government could yet be a disruptive influence when it publishes its budget proposal. Consequently, we expect GBP to slip relatively moderately vs. the EUR. We maintain a forecast of EUR/GBP0.89 on a 3 month view.”