No-deal Brexit uncertainty likely to push EUR/GBP towards parity – Rabobank

Jane Foley, the senior FX strategist at Rabobank, thinks that while the UK’s PM Johnson’s special advisor Cummings made the claim at the weekend that a no deal Brexit could not be stopped by MPs, various UK political figures have suggested that this may not be the case.

• “There is little doubt that the prospect of a no deal Brexit has risen sharply since PM Johnson took office last month. The scenario presented by Cummings suggests that there is so little time left between the start of the next parliamentary term and October 31 that the PM needs only to run down the clock to allow the UK’s legal default position of a ‘no deal’ Brexit to take place.  Insofar as the UK does not have a written constitution, there is no rule that would force a PM to resign even if he lost a vote of confidence.  This would leave open the prospect of Johnson hanging on to office until after the UK left the EU even without the confidence of MPs.
• Betting odds currently suggest that the probability of the UK leaving the EU this year without a deal is roughly 60%. It is our long standing view that on a no deal Brexit uncertainty is likely to push EUR/GBP towards parity. So, if Cumming’s view remains untested, we expect that it is highly likely that EUR/GBP will continue to move higher.  That said, the government has the chance to massage this outcome if it can reassure investors about the risks to the economy on a no deal scenario.
• Against the backdrop of a slowdown in world growth and Brexit concerns, the UK economy is stalling.
• UK Foreign Secretary Raab has promised that Brexit will bring a “huge series of upsides” for UK trade.
• If Raab’s plan to build the foundations for a trade agreement between the UK and the US receives a less favourable response than he had hoped, investors’ concern about a chaotic Brexit are likely to increase.  This could hasten upside potential for EUR/GBP near-term.  While we expect a no deal Brexit to bring parity for EUR/GBP, our 6 month view of EUR/GBP0.87 reflects our house view that Brexit will be delayed beyond October.”