According to analysts from Danske Bank, the tail risk of a hard Brexit has been reduced, which makes them change their forecast in favor of a stronger sterling.
Key Quotes:
“The new deadline for Brexit is now set at 31 January 2020. The question is now whether the current deal eventually will be passed following the 12 December general election, whether we’ll get a new EU referendum or whether we end up with a hung parliament and a likely new extension of Brexit. Nevertheless, tail-risk in sterling (risk of a no-deal Brexit) has come down substantially, as it seems unlikely that the UK will leave the EU without a deal, as Boris Johnson now has an actual deal with the EU. This is the reason why we have seen EUR/GBP move from around 0.90 to around 0.86.”
“Growth expectations are running around 1 percent, and downside risk is prevalent. But as of today, the numbers out of the UK remain decent. Inflation has been slipping a bit below target. The Bank of England has shifted in a more dovish direction, acknowledging global and domestic uncertainties. Should uncertainty continue, we think the Bank of England would consider changing the policy rate.”
“If UK demand comes back in force after a deal has been struck, sterling could get stronger than expected. Conversely, if politics sour once more, there is surely scope to reprice towards a weaker sterling, towards 0.90, say. We have changed our forecast profile to include the shift in probabilities, where the risk of a no-deal has faded.”
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