GBP: Political posturing - Rabobank

If it wasn’t obvious beforehand, activity in the pound since the Bank of England’s rate hike last Thursday has made it very clear that politics rather than economics is currently the main driving force behind the UK’s exchange rate, according to Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“It remains our central view that a trade deal between the EU and the UK will be done in time to avert a hard Brexit in March 2019. However, as time begins to run short, it is understandable that the market is becoming nervous.  Unless signs that progress on a trade deal begin to solidify, GBP stands to continue losing ground.”

“Last Friday BoE Governor Carney referred to the chances of a hard Brexit as being “uncomfortably high”. Over the weekend trade Minister Fox assigned a 60% probably of such an outcome.  Fox’s remarks ensured a higher open for EUR/GBP at the start of this week, though in fairness the pound had very quickly given back the gains made immediately after the announcement of a 25 bps BoE rate hike last week.”

“It has been our view for some time that a Brexit deal is likely to be of the last minute variety. As a consequence, we have expected for a while that EUR/GBP will be trading close to the 0.89 area in H2 this year.  Although the pound may be a little distracted by key economic data in the coming months, politics is set to remain the central focus.”

“Assuming a deal between the EU and UK is in place by year end we would expect GBP to trade on a firmer footing, though upside potential is likely to be limited if plenty of loose ends are kicked into the post Brexit transition phase.  If the market believes a hard Brexit is inevitable, we expect that EUR/GBP is likely to test and potential break above parity.”