GBP: Under the influence of UK politics - Rabobank

Jane Foley, senior FX strategist at Rabobank, notes that the cable has slipped to its lowest levels of the week after last night’s parliamentary shenanigans, but it remains above last week’s lows as GBP investors evaluate whether a positive outcome can still be gleaned from the latest Brexit turmoil. 

Key Quotes

“While the threat of a no-deal Brexit still looms large, it is possible that over the next few days some clarity will have emerged over whether new life can be breathed into PM May’s Withdrawal Agreement or whether instead MPs will attempt instead to consider negotiating a new customs union with the EU.  On either of these options, GBP is likely to benefit from a relief rally, with a new customs unions likely garnering a bigger reaction eventually.”

“If May’s deal is brought back to the Commons tomorrow and if it passes, GBP is set to celebrate. A win would imply that the UK would be leaving the EU on May 22 and the chaos of a no deal Brexit would have been avoided.  In this scenario we would expect EUR/GBP to push towards the 0.82 area and cable to move towards GBP/USD1.38.  If the deal fails again, investors may start to fear a hard Brexit.  This may lead to another leg lower for the pound, though it could prove short-lived.  It is possible that some Tories would switch their allegiance towards alternative Brexit options.  The Speaker has indicated that another series of indicative votes could take place on Monday.”

“Over the next few days it has to been assumed that MPs will be working to find common ground, meaning there is still scope for an alternative Brexit plan to emerge from the ashes over the next few days.  This would have the potential to support the pound during the course of next week, though it would require that the EU agrees to a longer extension to Brexit and UK participation in May’s EU parliamentary elections.”

“If a customs union Brexit is eventually agreed, GBP could settle below the EUR/GBP0.82 level.  However, in the near term optimism would likely to be tempered by inevitably bouts of uncertainty thrown up in the re-negotiation phase.”