UK's economy guided by Brexit developments – Rabobank

Jane Foley, the senior FX strategist at Rabobank, points out that it is their central view that Brexit will be delayed beyond October 31, but since a delay is not a solution, they see risk that EUR/GBP will be trading close to current levels on a 3-month view.

• “The Brexit related news reports yesterday reached fresh levels of animosity. One report suggested that the UK government would be prepared to withhold cooperation in security and defence for countries that pushed the UK into a Brexit extension. Given the likelihood of a general election in the UK in the coming months, investors are attempting to read between the lines of many of the recent headlines to try and determine how much is electioneering on the part of the UK government.
• The FTSE 100 has recovered some of last week’s losses but in the current environment, it would appear that GBP weakness is not sufficient to protect the UK’s largest companies from the impact of slowing global demand. This implies that while Brexit related news remains the primary driver for GBP, investors are likely to be drawn by tomorrow’s releases of UK August production data and monthly GDP.
• Even if tomorrow’s data releases do not enhance the clouds hanging over the UK economy, slowing global growth and domestic political uncertainty will ensure that GBP remains vulnerable. While the Brexit delay scenario and related 3-month forecast of EUR/GBP0.90 is our central view, on a no-deal Brexit we see scope for EUR/GBP to surge towards parity and on a Brexit deal we would expect EUR/GBP to drop back to the 0.85 area with a downside bias.”