UK: Brexit uncertainty and pound volatility - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that what is clear is that Brexit uncertainty is continuing to result in higher pound volatility as the lack of details over the UK government’s Brexit strategy has contributed to the wild ride for the pound over the last couple of months.

Key Quotes

“Building hard Brexit fears resulted in EUR/GBP rising sharply to an intra-day day of 0.9415 on the 7th October and it has since fully reversed its decline since the summer as hard Brexit fears have eased.”

“Recent price action supports our view that pound weakness last month was not fundamentally justified and driven by excessive bearish sentiment. The UK economy has been little impacted so far by the Brexit uncertainty which if sustained should help to further reverse bearish sentiment towards the pound. The market’s focus is also shifting away from Brexit and towards rising political risk in Europe heading into the middle of next year which could support a further strengthening of the pound against the euro in the near-term. A test of key support from the 200-day moving average at around 0.8250 appears likely. Beyond which it may prove more difficult for the pound to rebound further as it moves closer to pre-Brexit vote levels.”

“The latest IMM report has revealed as well that pound short positions still remain elevated. If the pound continues to disappoint market expectations for further weakness in the near-term it will increase the likelihood that shorts will be pared offering further support for the pound.”