Viraj Patel, Foreign Exchange Strategist at ING, views that GBP price action since Brexit has been reflective of some weighted distribution of the various endgame outcomes, with the probabilities shifting as developments unfold.
Key Quotes
“While this has led to near-term volatility, we believe the broader risks to GBP continue to lie to the downside – at least until the tail-risk of a ‘messy divorce’ has been taken off the table. With the UK government looking to keep their negotiating cards close to their chest post the triggering of Article 50 (still expected by the end of March 2017), we suspect the guessing game in markets may continue for a bit longer. GBP is likely to bear the brunt of this lack of political transparency, while further uncertainty over the UK’s eventual degree of access to the EU single market could see the emergence of new unaccounted risks:
- Domestic political risks: Risks of an early general election to linger as UK politicians remain split on the optimal Brexit strategy. Calls for a second Scottish independence referendum would gather momentum if substantial single market access is conceded.
- External stability risks: Ongoing uncertainty may not only see a slowdown in inward FDI flows, but a possible reversal of capital flows that would derail UK asset markets.”
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