GBP: Guided by the politics – Rabobank

Jane Foley, senior FX strategist at Rabobank, suggests that if GBP was looking remarkably resilient to UK political news at the end of last week, it’s nerve has given way this morning.

Key Quotes

“The pound has fallen sharply in European hours ahead of what promises to be a week full of twists and turns in Westminster.”

“The end of the parliamentary recess tomorrow is expected to bring rushed legislation from the Opposition aimed at stopping a no deal Brexit at the end of next month. Usually a bill can take weeks to proceed through all of its readings in parliament. However, there is the potential for a bill to be signed into law within days assuming it is not confronted with too many hurdles.”

“By Wednesday it could be clear which way this vote will go in the Commons. This would likely prove to be directional for GBP. At noon that day, PM Johnson holds his first parliamentary Question Time. This could give further clues as to whether or not the PM is hoping for an early election.”

“If legislation is passed this week that would rule out a no deal Brexit, the pound can be expected to rise. If it were decided that the Brexit deadline were to be extended but that the legal default position of the UK remained that a no deal Brexit could still take place at a future date, GBP may also rise, but by a lesser amount – since kicking the can down the road is not a solution. In this scenario we would expect EUR/GBP to be trading in the 0.90 area on a 1 to 3 month horizon.”

“If a no deal Brexit is ruled out will would expect EUR/GBP to clamber back towards the 0.86 area in 3 months. If fresh legislation is not passed this week and the UK remains on course for a no deal Brexit we would expect EUR/GBP to rise firstly back towards the recent high in the 0.9325 area. How high EUR/GBP can go may then depend on whether the EU summit in mid-October brings any Brexit compromises. On a no deal Brexit on October 31, we expect EUR/GBP to rise towards parity.”