GBP: Likely to be more volatile in the short term – Natixis

Nordine Naam, Research Analyst at Natixis, notes that in the week ended, sterling rebounded as high as 1.2494 against the US dollar, as a result of the squaring of short positions, spurred by several factors.

Key Quotes

“Besides the bout of weakness experienced by the US dollar, there was the fact that the Bank of England adopted a neutral stance (instead of a dovish stance) in reaction to the higher inflation, that there were better-than-expected macroeconomic indicators (notably the October PMI and Q3 GDP), and especially, that the High Court ruled that Parliament had to vote Brexit. This ruling has upset the government’s plans, as it did not expect that it would be Parliament that would trigger Article 50.

The British government is appealing the ruling before the Supreme Court, with a hearing expected between 5 and 8 December 2016. Even if the Supreme Court upholds the High Court ruling, meaning that Parliament must vote on the British exit, it is unlikely that MPs would vote against Brexit. If they did, this would trigger snap elections, the prospect of which should be enough to convince most MPs to vote for Brexit.

Whatever the outcome, the High Court ruling will modify the conditions as well as the timetable of the British exit, as getting the House of Commons and House of Lords to vote could be a lengthy process. It is therefore likely that Article 50 will be activated after 31 March 2017.

In the short term, the GBP/USD could clamber as high as 1.264, in particular if the probability of snap general elections heightens. However, over this horizon, it would be preferable to play an upturn in the GBP/USD’s volatility.”