UK: Political uncertainty making GBP vulnerable - Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that the expectations of a no deal Brexit have risen which is a direct consequence of the political stance of Boris Johnson, the frontrunner in the election of Conservative Party leader. 

Key Quotes

“In view of the political uncertainty, GBP is clearly vulnerable.   The EUR/GBP0.90 level is a key psychological level for the pound, but is it likely to be repeatedly threatened ahead of the Brexit deadline on October 31 given the risk of a no deal Brexit.”

“Bookies odds and opinion polls suggest that Boris Johnson would currently win 60% to 80% of the vote of Tory party members. The results of the European Party elections in May made it clear that many Tory voters were ready to desert to the Brexit Party if the government continued to stall over Brexit.  All contenders for the leadership vote duly hardened their Brexit positions.”

“In view of the fears associated with a no deal Brexit, GBP investors would favour a UK government led by Hunt over Johnson. That said, the higher risk that Johnson would be prepared to go head to head with parliament over a no deal Brexit brings in the potential of a no confidence vote.  This could lead to a general election.”

“The degree of uncertainty associated with the outcome of any general election and the policies of any new government would likely to be huge.  The implication is that GBP volatility could increase.   If Brexit is delayed into next year we see room for some relief and for EUR/GBP to drop back to the 0.86 area on a 6 month view.  On a no deal Brexit, we expect EUR/GBP to push towards parity.”