GBP still a vulnerable currency - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that although the market is not as worried about a hard Brexit as it was in October, the Brexit related uncertainties in the pound still mark the pound out as a vulnerable currency.

Key Quotes

“Having dropped around 6.5% during October, cable found its feet in early November as the UK’s High Court appeared to dilute the chances of a hard Brexit by ruling that parliament and not the PM has the power to decide when Brexit could be triggered.  Although many MPs have signalled that they would respect the outcome of the June 23 referendum on EU membership, a majority had been in the ‘remain’ camp and any debate on the UK’s negotiating stance would likely water down the prospect of a hard exit.  Although the UK’s Supreme Court is not due to publish its decision on the PM’s appeal to this ruling until early January, this week’s live streaming of the arguments of the case have not dented the market’s expectation that the ruling will go against the government.”

“Either way comments from Brexit minister Davis last week that the government would consider making a contribution for access to the EU’s single market have also supported the market’s current perception that a ‘soft’ Brexit is more likely than it appeared in October.  Since the market had built up hefty short GBP positions in Oct, this reduction in ‘hard’ Brexit fears sparked a squeeze higher in GBP.  That fact that the market has been paring its post US election USD longs also contributed to the move higher in cable to 2 mth highs.  Recently, the gains in GBP/USD ran into resistance at the 100 day SMA at 1.2790 and we would expect this level to hold near-term.”  

“While position adjustment can explain this month’s move higher in the pound, without a new piece of supportive UK political news we see little additional upside potential near-term.  Although the market appears to be expecting the Supreme Court to rule against the government, this news should by now be priced-in.”

“We see risk for GBP/USD dipping back to the 1.24 area on a 3 mth view in recognition of the political uncertainty that still clouds the UK.  In the absence of further signs that the UK could retain access to the EU’s single market post Brexit, we would argue that a recovery to the 1.30 area still looks to be a long way away.”