Jane Foley, Senior FX Strategist see a risk in the EUR/GBP pair of a move back above 0.90 in a 3-month view and warns that it could trade near 0.92 if not progress is seen in Brexit negotiations by December.
“A week ago it was far from clear whether PM May would hold on to her job beyond the weekend. The tensions surrounding May have died back for now, allowing GBP to recoup the losses suffered at the end of last week. However, as illustrated by the pound’s reaction to Brexit related news yesterday, the pound remains highly sensitive to political events.”
“Over the next couple of weeks the market will be turning its attention back to the BoE’s November policy meeting. The market is mostly prepared for a rate hike, though there remains a lot of doubt as to whether the economic outlook justifies a move. We have previous argued that Carney’s hawkish commentary in September was aimed at stabilising the pound and that he had some success in doing this until the UK political backdrop soured in early October. However, if a November rate hike is accompanied by further signs that UK growth is sluggish, the market will assume (as we do) that the BoE may not be able to follow any policy move for a prolonged period. This suggests that while a November rate hike may have removed some downside potential for the pound, it is unlikely to be able to completely counter the political and growth risk that are undermining the pound.”
“We see risk for EUR/GBP to move back to the 0.90 area on a 3 mth view. That said, if the EU and UK Brexit negotiations have not achieved significant progress by December, EUR/GBP could be trading closer to 0.92 on a 3 mth view.”
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