EUR/GBP: Potential for a move towards EUR/GBP1.00 on hard Brexit

"Volatility in EUR/GBP may be well below its peak of late last year but the same cannot be said of UK political developments," notes Rabobank research team. "This week has seen MPs from both the Labour and Tory parties break away. The common ground of the 11 MPs that will sit together in parliament as the Independent Group is that they favour remaining in the EU."

Key quotes

" Although UK diplomats have spun an optimistic line above the constructiveness of talks between UK and EU officials this week, there does not appears to have been any concrete movement. If PM May cannot bring something new to parliament next week she has promised to make a statement on February 26."

"Lawmaker are due to debate the government’s statement and potentially vote on amendments which could defy PM May’s position. The Cooper amendment would propose that if a deal has not been agreed by mid-March, the PM would have to bring a motion to parliament that would allow either a no-deal Brexit or an extension beyond March 29. Parliament would almost certainly vote for the latter. Whether or not the Copper amendment succeeds next week will be largely down to the number of Tory MPs that choose to rebel."

"If the Cooper amendment passes next week, the market will assume a hard Brexit is off the table and GBP is set to rally. That said, the size of any rally is likely to be limited by the fact that the market consensus is already well positioned for a soft Brexit and by fear that the UK economy is already slowing."

"If by the end of next week the UK remains on course for a hard Brexit we would expect fear to have started to eat away at GBP’s resolve. While our central projection is for EUR/GBP to be positioned in the 0.86-85 area on a 3 to 6 month view, on a hard Brexit will see the potential for a move towards EUR/GBP1.00."

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