GBP: Bad Brexit vibes return, but this time may be different - ING

Viraj Patel, Foreign Exchange Strategist at ING, explains that the EU’s chief Brexit negotiator Michel Barnier said last Friday that a Brexit transition period is ‘not a given’ – laying down the gauntlet for another tricky months or so of negotiations.

Key Quotes

“While we think the pound's 0.8% decline on the back of Barnier's comment was a bit of an overreaction, we suspect the next couple of weeks – a period which will see the UK government outline its Brexit vision in a series of speeches ahead of the 22-23 March EU leaders' summit – may see the return of a short-term Brexit risk premium priced into GBP.”

“But this time may be different. We cite four reasons for why (a) we expect any Brexit risk premium dynamics to be smaller than previously seen since the June-16 referendum and (b) why the risk-reward continues to favour GBP upside ahead of the 22-23 March EU leaders summit: (1) signs that markets are becoming less Brexit focused and more reactive to UK economic data surprises; (2) the Bank of England's Brexit-contingent hawkish signal will serve as a backstop to GBP; (3) the Brexit Divorce Deal precedence for a last minute solution may keep investors neutral until the 22-23 March EU leaders summit; and (4) latest positioning data shows that real money investors are still not yet ‘orderly Brexit believers’.”

“Therefore despite the potential for negative Brexit-headline risks for GBP over the coming weeks, it would be remiss not to ignore the potential for a sharp bounce back in the event of a favourable outcome - in this case, visible progression towards an agreed Brexit transition deal. We would look for GBP/USD to move sharply above 1.40 (our 1-month target is 1.43), while in a similar vein, EUR/GBP could fall back towards the lower-end of the broad 0.85-0.90 trading range.”