Viraj Patel, Research Analyst at ING, suggests that “Less Noise, More Poise” is their motto for GBP in 2018 and its resilience in recent weeks somewhat encapsulates this sentiment.
“While progress during Phase II of Brexit negotiations – and subsequent clarity over the UK’s new macroeconomic paradigm – will be the overarching theme dominating GBP’s direction of travel in 2018, we see two factors dictating the pound’s narrative in the short-term: (1) domestic UK politics and (2) the Bank of England’s policy path.”
“On the former, we believe noise around a fragile Tory government may act as a limiting factor for the currency – but note that the bar to actively sell the pound on UK politics remains high. This has been evident in GBP positioning data; while speculative investors have turned net long in recent months, this adjustment in positioning has been mainly driven by GBP shorts bailing – which suggests to us that the attractiveness of selling GBP has been fading given the absence of any factor that could seriously delay Brexit talks and push the UK closer towards the March 2019 cliff-edge. In terms of UK politics, only a 2018 General Election may feasibly see such risks being priced into GBP. This is not our base case scenario.”
“Instead, we prefer to focus on potential catalysts for a positive reassessment of the UK economic cycle and a hawkish re-pricing of BoE policy expectations. We cite 2 non-mutually exclusive factors – an agreed Brexit transition deal by 1Q18 and positive surprises in UK economic data. Some combination of these factors could bring into play a 1H18 BoE rate hike (likely May). Our conviction call is for GBP/USD to rally up to 1.40 on this story, with EUR/GBP moving to 0.85-0.86.”
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