Economist Lee Sue Ann and Senior FX Strategist Peter Chia at UOB Group reviewed the current developments around Brexit and the prospects around the British pound.
Key Quotes
“UK PM Boris Johnson has claimed there will be no more trade and security talks with the European Union (EU). “Unless there’s a fundamental change of approach, we’re going to go to the Australia solution, and we should do it with great confidence,” he reportedly said. The “Australia solution” refers to trading on World Trade Organization (WTO) terms — in other words, without a formal trade deal.”
“Whilst the chances of a “no-deal” happening have increased, a “no-deal” scenario is not yet certain, as talks will continue. EU’s chief negotiator Michel Barnier and UK’s chief negotiator David Frost will, however, resume technical talks on Monday. Brussels expects the Brexit negotiations to resume within days, as Michael Gove – the minister handling Brexit issues for the UK – in the latest developments, has confirmed that despite Downing Street’s tough rhetoric, the door remained “ajar” on re-engagement.”
“Boris Johnson’s posturing towards a “no-deal” is a clear negative on the GBP. Sentiment on the currency is already dented by a new wave of coronavirus infections across the UK. So, until an eleventh-hour deal, the risk is still to the downside of GBP/USD. There is also scope for further shorts in the GBP/USD as net speculative short-positioning is only one-tenth (US$792m now vs US$7.8b in Aug 2019) of what is reached last summer when pricing for a “no-deal” Brexit was the most intense. So, we reiterate our defensive view on GBP/USD in the immediate quarter and expect the currency pair at 1.25 at end-4Q20.”
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