Brexit breakthrough supports bullish GBP view - MUFG

Derek Halpenny, European Head of GMR at MUFG, points out that they have long argued that the removal of the cliff-edge risk linked to the March 2019 potential hard exit from the EU would have a much greater impact on lifting sentiment than widely assumed.

Key Quotes

“We saw further evidence of the current pessimism recently with the OECD the latest entity to present a weak growth outlook over the coming two years. The OECD predicts real GDP growth will slow from 1.5% this year to 1.2% next year and 1.1% in 2019. But with FX-induced inflation set to fade, with growing evidence of wage growth picking up, with the euro-zone economy near-on booming and with a transition period of two-years now about to be confirmed, we struggle to see why the economy will slow as the OCED forecasts.”

“News that the EU and the UK have reached an outline deal on the financial settlement is very significant and despite recent increased concerns over the Irish border issue, this is the most important development pointing to a likely deal.”

“While the Irish border issue is hugely complicated and hence we should certainly not under-estimate the Irish government’s determination to get what it wants, the likelihood is that the EU and the UK will agree to some form of carefully crafted written agreement that will provide the guarantees required by the Irish government in order to ensure its veto is not used. While this remains to be resolved in the coming days, we doubt it will result in a breakdown in the formal progression of talks to transition, possibly being announced following PM May’s meeting with JeanClaude Juncker on Monday.”

“The pound would no doubt be stronger today were it not for that lingering uncertainty over the Irish border but assuming this does not thwart progress our year-end GBP/USD target of 1.3600-1.3700 is clearly achievable. Furthermore, levels over 1.4000 next year are also achievable based on actual economic growth being stronger than the building consensus of economic weakness in the coming years.”