UK: Why risk-reward still favours GBP upside despite Brexit risks? - ING
|Viraj Patel, Foreign Exchange Strategist at ING, suggests that they cite four reasons for why (a) they expect any Brexit risk premium dynamics to be smaller than previously seen and (b) the risk-reward continues to favour GBP upside ahead of the 22-23 March EU leaders summit.
Key Quotes
“Signs that markets are becoming less Brexit-focused and more responsive to UK macro data. This means that a continuation of solid UK economic data would offset any Brexit-specific risks. Such a trading environment was non-existent in 2017, where markets were largely taking their cue solely from Brexit progress.”
“The Bank of England’s Brexit-contingent hawkish signal may reduce the inclination for any speculative short GBP plays on Brexit noise, thereby warranting a smaller risk premium (or a less persistent GBP disconnect from fundamentals). Equally, based on the reaction following the Bank of England's hawkish signal at the September 2017 BoE meeting - which teed up a November rate hike - we estimate that GBP should currently be trading circa 1% higher (and closer to 1.40). We would expect to see the deferred GBP upside potential realised (in full) in the event of a positive outcome over a Brexit transition deal.”
“Brexit Divorce Deal precedent for a last minute solution means that investors may be reluctant to reassess odds of a Brexit transition deal right up until the 22-23 March EU leaders summit. This would imply that price action follows a more ‘trade the Brexit facts’ path – rather than seeing speculators taking a punt on the outcome of Brexit transition negotiations.”
“Real money investors are yet to be ‘Brexit believers’. While the latest CFTC data shows that net long GBP/USD positioning stands at 14% (slightly below the five-year high of 22%), we note there remains a large discrepancy between leveraged funds and asset managers/institutional investors. In particular, we note the latter group of investors remain net short GBP/USD (13% of open interest) - which suggests that the market still remains structurally short. While the CFTC data only captures a fraction of the market - we do think there is scope for more Brexit good news and lower UK economic uncertainty brought about by a transition deal to see a further deleveraging of short GBP/USD positions. This story alone should help GBP/USD consolidate in the 1.40s - with the UK macro and fundamental story determining which side of 1.45 we sit.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.