GBP/USD to nosedive 5%-10% on Brexit deal failure – MUFG

The pound has been one of the worst-performing G10 currencies overnight amidst a broad-based rebound for the US dollar off recent lows. Brexit talks have yet to yield a breakthrough and a failure is set to down sterling by 5% to 10%, according to Lee Hardman, Currency Analyst at MUFG Bank.

Key quotes

“Pound weakness has been driven in part by reports that some EU countries are insisting that ‘no deal’ is better than a bad deal. According to Politico, senior EU officials and diplomats say that several countries including France, the Netherlands and Spain are worried that the EU’s mission-focused chief negotiator Michel Barnier may be too eager to conclude a deal with the UK and that EU heads of state and government will have to step in to stop an agreement that is worse for the EU than a no-deal scenario. Overall though EU officials would much prefer to reach a trade agreement.” 

“A head-to-head meeting between chief Brexit negotiators Michel Barnier and David Frost today has been described as a ‘moment of truth’ by one EU official. If there is thought to have been sufficient progress, the UK team could remain in Brussels over the weekend. Observers still expect a deal early next week or in the first week of December. Market participants are similarly not that concerned over the risk of no-deal Brexit at this point in time.” 

“There is likely to be a much larger pound move to the downside if both sides fail to reach a deal (-5% to -10%), while we expect a modest move to the upside for the pound if a deal is finalized (+1% to +4%).”