GBP to bounce back as initial chaos in Westminster looks to have been averted - ING

Prime Minister Theresa May is set to bounce back this week from what has been described as a ‘disastrous’ Tory party conference speech by attempting to get a grip on both the internal strife within her government and the ongoing deadlock in Brexit negotiations, according o Viraj Patel, Foreign Exchange Strategist a ING.

Key Quotes

“Talk of a Cabinet reshuffle dominated the weekend press, though the Sunday Times notes that the PM will wait until after the critical Brexit-focused European Council meeting on 19-20 Oct before making any changes to her Cabinet. Still, the tentative show of unanimity within the Cabinet looks to have – at least for now – drawn a line under questions about the PM's leadership. This might help to ease some of the downward pressure on GBP as fears of imminent chaos in Westminster have been thwarted.”

“In terms of personnel changes within the Cabinet – as we noted below, were the Foreign Secretary Boris Johnson to leave or be denoted, markets may see this as drawing a line under the current internal split within government on key Brexit issues. This could lead to a symbolic relief rally in GBP – as it could lead one to factor in more progressive Brexit talks. On the flip side, we think rumours of Chancellor Hammond leaving may be unhelpful for GBP in the near-term; his vision of a Brexit that prioritises the safeguarding of the UK economy – while remaining fiscally prudent – has been a supportive factor for the currency (as it allows markets to price in a lower political and fiscal premium).”   

“Bottom line: We look for GBP to recover its politically-induced losses this week. We target GBP/USD moving up to 1.3250-1.3300 and EUR/GBP to 0.8850-0.8880. The fifth round of Brexit talks are not expected to yield any meaningful new developments, while we believe that EU leaders voting ‘No’ to there being any sufficient progress in Brexit negotiations at next week’s Council meeting is already in the price of GBP. Therefore an easing of domestic political risks can only be good news for GBP, allowing the focus to shift back to the cyclical BoE and economic recovery story.”