GBP to rally initially if EU grants UK any delay to Brexit beyond March 29 - Rabobank

"Assuming that May is not successful in pushing her plan through the Commons next week, the prospect of a much longer deal becomes likely," notes Rabobank analysts.

Key quotes

"European Commission President Tusk has suggested that the EU could be open to a long extension “if the UK finds it necessary to rethink its Brexit strategy”. Assuming May fails to win backing for her plan next week, MPs could submit alternative plans which are likely to include a closer relationship with the EU, potentially retaining customs union membership. Ultimately this would be GBP positive."

"However, in the interim the pound could be subject to volatility dependent on the twists and turns of political wranglings. While GBP would likely rally initially if the EU grants the UK any delay to Brexit beyond March 29, the fact that a no deal Brexit would still be on the table in these circumstances coupled with concern that the economy would continue to suffer under the burden of political uncertainty would likely limit upside potential."

"Assuming that May’s deal does not pass next week but that a longer delay is granted by the EU, we would expect GBP to rally towards this week’s highs in the 1.3380 area. If a softer Brexit then became likely, the pound would likely rally further. If this prospect did not start to harden soon, GBP could become very exposed on the downside to fears of a hard Brexit. On the event of a chaotic exit from the EU we see risk of cable plunging below the GBP/USD 1.15 level and EUR/GBP soaring towards parity." 

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