GBP expected to trade in a jittery fashion - Rabobank

One of the issues for GBP at present is that negatives and positive GBP factors can be drawn from latest UK election outcome which is a consequence of the revival of the soft vs. hard Brexit discussion which had previously been laid to rest in January when PM spelt out her 12 point plan in favour of a hard Brexit, explains Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“In this environment, GBP can be expected to trade in a jittery fashion.  That said, the longer political uncertainty is left unresolved, the greater the downside risks for GBP become.”

“Political uncertainty tends to be currency negative.   The drop in the value of the pound on the back of latest election result is a logical knee-jerk reaction to the failure of the Tory party to maintain its majority in parliament.”

“The UK is due to commence the Brexit talks with the EU27 amid reminders from the EU Chief negotiator Barnier that the clock is ticking.  Over the next few days the pound will be particularly sensitive to any news regarding May’s platform for Brexit talks.  However, any lack of confirmation that May has softened her position or a significant delay in the start of the Brexit talks is likely to give way to disappointment.  In turn this is likely to expose the pound to the full weight of downside pressure implied by a weak government.   While indication over a softer Brexit could support the pound, upside is likely to be limited given signs that the UK economy is slowing and by concerns that the Brexit talks could still be tough.  We expect EUR/GBP to end the year around 0.89/90 and we see GBP/USD in the 1.28 region at year end supported by a soggy USD.”