GBP: Guided by the UK politics - Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that the GBP has leapt higher, though there is still plenty of uncertainty in UK politics linked both to Brexit and the shape of the UK government. 

Key Quotes

“Counter to the majority view of her own cabinet PM May has turned away from risking a no deal Brexit on April 12 in favour of a last ditch attempt to scrabble together a deal with the Labour Party.”

“As yet there have been no cabinet resignations from Brexiteers despite their distain of May’s choice to snub their preference of a hard Brexit in favour of a decision to pursue a potential compromise with Corbyn. It can be argued that May had little choice by to by-pass the demand of the Brexiteers given the risk that parliament would likely have passed legislation to avoid a hard Brexit before the April 12 deadline.”

“Not only does the threat of a hard Brexit still hang over the outlook for the pound, but so does the risk that UK politics remains messy and divided for some time to come. Even if a Brexit deal is agreed, negotiations about the future relationship between the UK and EU will persist for the next two years at least.  In addition, domestic politics is likely to be fractious.”

“A Corbyn led government would spark fear of re-nationalisations in the market are could unleash further downside pressure on the pound.   Currently we are forecasting EUR/GBP at 0.82 in 6 months on the view that a Brexit deal will be agreed.  However, a period of messy domestic politics could make this forecast appear optimistic.”