GBP: performance to be affected by UK election and polls – Rabobank

The Pound rallied significantly in October on the view that the prospect of a no deal Brexit is now small but there are, however, some scenarios in which the United Kingdom could still crash out of the European Union, explained Rabobank analysts. They see 

Key Quotes: 

“According to some forecasters, the progressive increase in the popularity of the Tory party since the middle of the year suggests that there is the possibility that Johnson may be able to preside over a majority in parliament after the election. The market is assuming that this will lead the government to pass Johnson’s withdrawal bill into law and move onto the next phase of negotiations with the EU. GBP/USD could initially spike higher to the 1.32 area or even beyond on this election outcome with EUR/GBP potentially dropping below 0.84. However, the gains may not last. If the ensuing trade negotiations with the EU do not go well, the risk of a no deal Brexit at the end of the transition phase could again re-appear.”

“If the probability of a no deal Brexit was seen to rise again at any point between now and the end of the transition phase in December 2020, we expect that GBP/USD could plummet to the 1.15-1.10 area and that EUR/GBP could start to approach parity.”

“Another risk for GBP comes from the opinion polls themselves. While GBP can be expected to be influenced by the predictions of the pollsters in the weeks leading to the December 12 election, there is the clear risk that the signals will be misleading.”

“Our central view is that GBP/USD will be trading close to current levels on a 3 to 6 month view with EUR/GBP trading around 0.84. This assumes that Johnson’s withdrawal bill will be passed through parliament and that a trade deal with the EU still appears as a reasonable prospect. This scenario would also imply a calming of political mayhem in the UK and signs of more coherence amongst MPs.”

“While we see risk of an initial spike if Johnson is successful in selling his Brexit bill to a new parliament, the slowdown in global growth still suggests that the pound is still likely to be exposed to economic headwinds and speculation about potential BoE rate cuts. These uncertainties coupled with the realities of trade talks are likely to take the froth out of any initial relief rally.”