GBP: Solid UK data + positive Brexit deal sentiment = A big rally (with caveats) - ING

A buoyant pound heads into next week’s key October EU summit trading on the sentiment that a Brexit Withdrawal Agreement is almost done. But we wouldn’t be surprised if there’s some degree of lingering scepticism – not least with the Salzburg disappointment fresh in investors’ minds and the seemingly trivial, yet significant, UK political hurdles that still need to be overcome," argue ING analysts.

Key quotes

"We think any deal announced would need to stand the following test for GBP to hold onto further gains: (1) the deal is able to command a majority within the UK parliament and (2) the high-level future trade agreement doesn’t tie the UK to an obvious hard Brexit trade deal. Any announced exit deal as early as next week that meets the above two tests would see markets all but fully price out the risks of a no-deal Brexit – thus fuelling further bullish GBP/USD momentum towards 1.34-1.35. But if there are still doubts about whether a Brexit deal could get through UK parliament - or no big announcement next week - we could see some profit-taking or a buy-the-rumor, sell-the-fact type of reaction that sees GBP/USD retreat to 1.3050-1.3100. Expect volatility either way with option markets pricing in a significant move (one-week breakevens around 150 pips)."

"It's also a big week for UK data releases - with the usual flurry of the labour market, CPI and retail sales reports all due. Our economists note that kicking off a packed week of UK data, we’re likely to see another decent wage growth figure on Tuesday, confirming that skill shortages across the economy are pushing employers to raise pay to attract/retain talent. In fact, there’s a possibility that headline (ex. bonuses) wage growth nudges up to the symbolic 3% level. Headline CPI could also come in elevated, while retail sales may contract on a monthly basis after a booming summer of consumer activity. The mixed UK data shouldn't really have too much of an overall impact on GBP - with Brexit deal sentiment the key driver. But solid data - coupled with positive Brexit sentiment - could provide a double boost to the pound next week. "