UK politics remains incendiary - Rabobank

In view of Jane Foley, Senior FX Strategist, while the relative economic positions of the Eurozone and the UK provides a framework for the outlook for EUR/USD in the medium-term they would expect UK politics to be the main driver for EUR/GBP heading into the remainder of the year. 

Key Quotes

“Last week brought the resignation of the UK’s International Development Secretary Patel just days after the resignation of disgraced defence minister Fallon.  This comes as a Cabinet Office inquiry continued into the behaviour of May’s ally Green.  It has also emerged that a former aide to Fallon was being investigated by police and follows the publication of an opinion poll that shows that public confidence in the Brexit negotiations and Mrs May’s ability to strike a deal has fallen to a fresh low.  The news brought back to the fore concerns over the effectiveness of May’s leadership and the question of whether it can sustain long enough to bring the Brexit negotiations to a conclusion.”  

“The last significant flurry of concerns over the ability of the PM to hold onto her job came in early October after the Tory Party Conference and May’s disastrously delivered speech, which for many was a strong metaphor for her loss of authority.   The immediate threat to May’s job passed mainly due to fear.  The Conservative Party has not been able to produce an agreed successor with Tory ‘Remainers’ fearful of a ‘hard Brexiter’ and all in the party reluctant to set in motion a series of events which have the potential to end with an early election.”

“Polls continue to suggest that the Labour Party would have a strong chance of victory if another election is called.  That said, the Telegraph reported this week that there could be 40 Tory MPs willing to call on May to set a date for her departure.   Going forward GBP will be vulnerable to any signs that the number of Tory rebels pressing for May’s departure is on the rise.  Aside from the risks that the odds of another general election could increase, more trouble and strife for May has negative implications for the progress of Brexit talks.”

“The latest round of Brexit talks took place in Brussels last week.  No significant breakthrough has been claimed with EU negotiator Barnier indicating that the UK has just two weeks to clarify its position on legacy issues if trade talks are to commence in December.  For this to happen there will have to be more movement on the N. Ireland border, the divorce settlement and the rights of EU citizens.”  

“It is our view that GBP remains vulnerable to political uncertainly going forward most specifically regarding Brexit.  Although we are optimistic that an EU/UK trade pact will eventually be agreed, all Brexit proceedings to date suggest that this could be a last minute compromise.  In the meantime uncertainty is likely to weigh on UK investment and growth potential.  The implication is that GBP has the potential to slip further on a 12 mth view before snapping back around March 2019.  We retain a 12 mth forecast of EUR/GBP0.95.”