GBP is likely to move higher on confirmation that a cliff edge Brexit on Friday will have been avoided - Rabobank

Jane Foley, a senior FX strategist at Rabobank, suggests that the GBP may be holding on to its position as the best performing currency YTD, but it is the worst performer on a 5-day view.

• “In our view, the strength of the pound in recent months reflects an optimistic bias build around the consensus view that a hard Brexit will be avoided.  However, with the UK ‘s legal position still on course for a cliff edge Brexit in just two days’ time, it is unsurprising that some nervousness has been entering the market.”
• “Although the pound is likely to register some relief if a delay to the Brexit start date is agreed at the EU leaders summit this evening, this will likely be limited given that any postponement almost certainly means that political uncertainty and the economic damage that this implies will be more protracted.”
• “On the assumption that a Brexit deal is done, we have been forecasting that EUR/GBP can trade in the 0.82 region on a 6-month view.  However, in consideration of the political mess in the UK that the Brexit process has left in its wake, this forecast may be too optimistic for the pound and we now see upside risk to this forecast.”
• “GBP is likely to move higher on confirmation that a cliff edge Brexit on Friday will have been avoided.  That said, the damage to the economy caused by political uncertainty is becoming clearer.  Therefore, news that the UK is to remain in Brexit limbo for longer is not much of a cause for celebration.”
• “Recently the issue of whether to back a second referendum has created turmoil.  Also, eight of the eleven members of the UK’s newest political party, Change UK, came from the Labour Party.  If there were a general election both the Conservative and Labour parties would almost certainly see support weaken which would likely result in a hung parliament and possibly a Labour-led coalition government.  Given such a messy backdrop, the outlook for GBP is likely to remain clouded for a protracted period.”