GBP remains vulnerable to fears Britain's next PM to take a more hard line on Brexit - Rabobank

Jane Foley, the senior FX strategist at Rabobank, notes that no one knows for sure whether UK’s new MEPs will remain in their seats in the European Parliament for a meaningful period.

• “Irrespective, the results of the European parliamentary elections have already had an influence on domestic UK politics and investors are combing through the various permutations and combinations in an attempt to evaluate the possible impact on UK assets and the pound.
• In our view GBP remains vulnerable in the near-term to fears that the new PM will take a more hard line on Brexit.  However, the risk that parliament will oppose a no deal Brexit is likely to put a floor under GBP in the coming months.
• The outlook for UK politics clearly remains highly charged. The first major focus for GBP investors will be the Tory leadership election, the result of which are expected in July. If the new leader sees a no deal Brexit as a live option in October, GBP can be expected to fall towards the December low in the region of GBP/USD1.2480.
• However, the potential for further losses is likely to depend on how much parliament looks likely to push back against a no deal Brexit. This process, however, will be disrupted by parliament’s summer recess which usually lasts from late July until early September. This means that the final weeks before the October 31 Brexit date are likely to be fraught with political tension and in the meantime GBP will be clouded by political woes.
• On a no deal Brexit, we see potential for GBP/USD to plunge to the 1.10 region and for EUR/GBP to push towards parity.”