GBP: Guided by the UK politics – Rabobank

According to Jane Foley, senior FX strategist at Rabobank, it is difficult to say for certain whether Chancellor Merkel yesterday intended to sound conciliatory in her meeting with PM Johnson or whether she was merely being wry.

Key Quotes

“She has challenged the UK government to come up with a solution to the Irish backstop issue (that would avert a no-deal Brexit) within the next 30 days.   This is despite the fact that negotiations between the UK and the EU failed to find an alternative solution during two years of talks.”

“The obvious difficulties in inventing an alternative to the Irish backstop combined with the fact that the PM has previously indicated that he is prepared to go through with a no deal Brexit does not, in our view, offer much solace for GBP investors.”

“Despite ample scope for cynicism on Brexit related news, GBP has edged slightly higher vs. both the EUR and the USD on a 1 day view. In the past few months speculators have built large short positions in GBP and this can make the currency more sensitive to any sniff of compromise. That said Johnson is today due to have a working lunch with French President Macron in Paris. Macron has already ruled out any renegotiation of the Brexit deal and his government has stated that a no deal Brexit is now their central assumption. Therefore investors could be faced with a set of very unconciliatory headlines on Brexit today and the same could be true of the G7 meeting this weekend.”

“It remains our central view that a delay to Brexit beyond October is likely. This, however, would be a grave threat to the Johnson government and possibly the Tory party also. Although a no confidence vote in the PM could usher in a caretaker government, this would be temporary and the UK could be faced with a snap general election potentially before the end of the year. This would mean continued political uncertainty in the UK and an even more prolonged period of Brexit ambiguity. Consequently even though a delay to Brexit would likely trigger some relief in GBP markets, we anticipate that EUR/GBP could be hard pressed to fall below the 0.90 level on this scenario on a three month view. On a no deal Brexit we see scope for EUR/GBP to rise to parity.”