GBP: Hope and despair? - Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that in the middle of the political turmoil, GBP yesterday managed its largest one day gain since the middle of December on hopes of a positive result coming out of this evening’s meeting between PM May and European Commission President Juncker.

Key Quotes

“On the margin there has also been some movement regarding the prospects for a second referendum.  The move in the pound reaffirms the market’s persistent optimism with respect to the Brexit outcome and underpins the likelihood that while GBP could see a moderate rally on a soft Brexit, the market is woefully unprepared for a ‘no deal’ outcome.”

“We maintain our view that on a soft Brexit EUR/GBP is likely to settle down in the 0.85 to 0.87 area in the coming months.  On a hard Brexit, we would expect EUR/GBP to spike up towards parity.”

“Although the recent releases of better than expected January retail sales and CBI trends data together with and strong labour market numbers have provided some support to the UK economic outlook, there is plenty of evidence that political uncertainty has taken its toll on confidence and activity levels in the UK economy.  This has lowered the market belief that the BoE will follow through on its hawkish policy guidance particularly in light of evidence of slowing growth in the Eurozone.  Near-term, GBP is likely to be vulnerable to the outcome from this evening’s meeting between May and Juncker disappoints.”