GBP/CHF: Risks for the pound remain to the downside in the near-term – MUFG

Analysts at MUFG Bank continue to see the GBP/CHF headed to the downside in the short term. They see a potential benefit of the Swiss franc from inflation concerns and the pound facing increasing downside risks. 

Key Quotes:

“We believe that risks for the GBP remain to the downside in the near-term. Firstly, we expect real yields in the UK to remain under downward pressure after the BoE stuck to plans to raise rates only gradually. At the same time inflation expectations could continue to drift higher as headline inflation continues to pick up towards 5% heading into year end. The release of the latest UK CPI for October in the week ahead could add to those inflation concerns.”

“We are wary of a heightened risk of a more disruptive Brexit outcome from the ongoing EU-UK tensions over the Northern Ireland protocol. Both sides remain far apart and there is increasing speculation that the UK government will trigger Article 16 which could be met by a powerful response from the EU that even puts No Deal Brexit risk back on the table. The UK government’s decision is expected by early December. Fresh EU-UK trade tensions could reinforce concerns over supply disruptions in the UK which are already contributing to the less favourable outlook for growth and inflation.”

“We chose a long CHF leg as we have already recommended long USD exposure against the EUR. The CHF should continue to benefit as well from building concerns over higher inflation. The CHF has proven to be better store of value over the long-term. It should also benefit from a pick-up in Brexit risks. Technically, EUR/CHF is approaching pandemic lows at 1.0505. CHF strength could accelerate if key support levels are broken and the SNB does not step up intervention to dampen the move.”