According to ING analysts UK PM Johnson’s intention to suspend parliament underscores the uncertainty and the ample downside risk the pound faces over the coming weeks.
Key Quotes
“Even if parliament attempts to legislate against 'no deal', the week-long window before parliament is suspended is unlikely to be long enough for this to succeed. It also seems too early for a no-confidence vote to be successful (this in our view will likely happen in the latter part of October). This suggests more pressure on GBP as the perceived risk of a 'no deal' Brexit won’t be reduced during the first half of September. If anything it could rise, pointing to further sterling weakness.”
“We look for GBP weakness to build into the mid-October EU summit, given a deal still seems unlikely and the uncertainty about a hard Brexit will increase. This is when we expect EUR/GBP to re-test the multi-year high of 0.9325 reached earlier this month.”
“The recent compression in GBP risk premia (be it as a measure of our short-term EUR/GBP financial fair value, or EUR/GBP risk reversals) points to room for further GBP downside, as risk premium can be rebuilt into GBP yet again.”
“However, in the final two weeks of October (after the EU summit), the most likely scenario is that the UK parliament delivers a vote of no confidence in the government and paves the way for early elections. This should stabilise GBP in the early part of 4Q19 as the worst case of a 'no deal' Brexit is averted. However, it is still too early position for the eventual GBP rebound at this point as we believe things will get worse before they get better.”
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