GBP/USD risk factors: point to 1.2000 - Nomura

Analysts at Scotiabank noted that the GBP bounced on announcement that the UK parliament would discuss the plan for the UK to leave the EU. However, the government added that the EU referendum result must be respected and that the government's negotiating strategy should not be undermined.

Key Quotes:

"We do not expect a significant change in the government’s negotiation stance, and once the dust settles we expect GBP/USD to continue its decline to 1.20 and EUR/GBP to continue rising to 0.92 in our view. The recent bond sell-off is clearly weighing on risk sentiment, and we expect this to continue.

Another obvious market risk factor is a Trump victory in the US elections, though the likelihood of that has fallen in recent days. But these are not the only risks that keep us awake.

Indeed, there are five larger macro risks that would constitute an (irregular) pentagon of fear. These are a) the de-globalisation theme, b) the eurozone’s leverage problem, c) China’ s ongoing rebalancing process, d) the sustainability of the BOJ’s 10yr rate peg, and e) the spike in oil volatility. Possible trend changes in global yields are attracting FX market interest.

If higher global yields and steepening curves avoid a risk-off reaction, we estimate that JPY will continue to weaken. However, the way risk sentiment reacts to steepening is important for G10 FX performance, especially for JPY and the commodity currencies.

We think USD/JPY’s gradual rise since the September BOJ meeting is reasonable at the moment as global yields are higher and have not had a clear negative impact on risk sentiment. Sustained JPY weakness depends on risk sentiment being resilient if global yields continue to rise."