Tuesday’s session on the foreign exchange rate markets
saw the PM May address Parliament on the state of
current Brexit negotiations. While the Prime Minister
reiterated a commitment to seeking assurances over
the finite nature of the backstop arrangement, should
it come into effect, the EU have remained steadfast in
their opposition to reopening negotiations.
The PM also called for more time to secure a revised
deal, pushing back a potential meaningful vote until
the end of February. Despite requesting more time, the
PM rejected calls from all sides of the house to seek an
extension to the March 29th article 50 deadline.
Meanwhile, Labur Party leader, Jeremy Corbyn
accused the Prime Minister of running down the clock
in an attempt to “blackmail” MPs into backing her deal
or face the repercussions of a no-deal Brexit.
Brexit Resolution Remains Crucial For Pound-Sterling Institutional FX Forecasts
Last week saw the Pound Sterling (GBP) sustain its
largest weekly declines since October of 2018 as
markets re-priced for elevated Brexit uncertainty. The
persistent drag of Brexit uncertainty, on both direct
GBP-focused sentiment and via the negative impact on
UK business and consumer activity and confidence
reasserted itself as the UK barrels towards a no-deal
At the time of writing, the Euro-to-Pound exchange
rate was seen to be trading at £0.87645, at the upper
bound of the intraday range.
Meanwhile the Pound-to-Dollar exchange rate was last
seen at $1.28983 after several runs on resistance at
While hope remains that the UK and EU can strike a
deal which allows for an amicable divorce, in lieu of an
extension, the March 29th deadline will see the UK exit
the EU without a deal. Therein, Prime Minister May
continues her efforts to seek alterations to Irish
backstop component of the EU withdrawal agreement
after rejecting calls from the Labour Party to pursue a
permanent customs union with the EU.
Highlighting the impact of Brexit on economic activity,
Monday’s data releases saw UK gross domestic product
(GDP) growth come close to stagnation in Q4 2018,
printing 0.2% growth. Meanwhile, business investment
fell as firms curb spending ahead of the unknown
Brexit outcome while manufacturing and construction
output declined sharply.
- MaybankCommenting on the expected Brexit route ahead and the subsequent Pound Sterling (GBP) impact, Maybank analysts look to the February 14th debates a potential source of developments. In the Malaysian bank’s FX brief, analysts wrote “Eyes are on the parliamentary debate on Brexit on 14 Feb
(this Thu). ..The government has ruled out Corbyn’s proposal on Brexit customs union with the EU and the meaningful vote is unlikely to happen within the week.”
They added “While we caution for downside risks and 2 -way volatility on the GBP in the near term, we retain our cautious optimism on GBP outlook beyond the near term nuances as we see a case of no -deal brexit being avoided and expect both EU and UK to come to terms on a compromised deal, at the eleventh hour .”
Regarding the Pound-to-Dollar (GBPUSD) exchange rate, Maybank analysts wrote that “Near -term support is seen at 1.2845 at this point and a break there could open the way towards 1.2758. Resistance at 1.3030 “ and “We see a falling wedge formation forming for this pair, a bullish formation. In the near -term, two -way action likely within 1.28 -1.30. “
- INGCiting the need for more Brexit clarity as a precursor for the Pound Sterling to re-start the appreciation trend which saw the GBP rebound against peers through January 2019, ING’s head of FX, Chris Turner’s GBP forecast remains contingent with a breakthrough the “key ingredient for large GBP upside”.
In ING’s latest FX forecast, Turner wrote “With UK-EU negations coming down to the wire and downside pressure on EUR/USD, we expect GBP/USD to struggle to move meaningfully above 1.30 this month. As per below, scope for GBP upside should only re-appear once odds of tangible deal increase. But this may not be the case until March (or later).”
“The Brexit stand-off resolution is the key ingredient for large GBP upside. With the economy suffering from the Brexit uncertainty (as evident on the dismal January UK PMIs) and the BoE unlikely to raise rates anytime soon, GBP upside look limited.”
“Under the no deal scenario we expect a sharp move in GBP lower, with EUR/GBP above 0.95 (and even testing parity in case of flash crash) and GBP/USD dropping to the 1.10-1.20 area.”
- Danske BankChief analyst, Allan von Mehren of Danske Bank, expects Thursday’s parliamentary session and vote to be crucial for the Pound Sterling near-term. MPs are due to convene, debate, and vote on the Brexit route ahead on the 14th February in lieu of a clear proposal from the PM.While the PM has yet to secure meaningful concessions, legal assurances or alterations to the EU withdrawal agreement, she is expected to ask MPs for more time to pursue these goals, potentially seeking a delay to the vote until February 26th.
Mehren wrote “The growth picture has become weaker, as Brexit uncertainties are weighing on investments and global growth has slowed. In the Brexit saga, the next thing to watch is a vote on Thursday in the British Parliament”
He added “For GBP, the most important event this week is the Brexit vote in the House of Commons tomorrow. Here the MPs have the opportunity to force PM Theresa May to ask the EU27 for an extension of Article 50. If triggered, it will be supportive for GBP and could send EUR/GBP towards the lower end of the 0.86-0.89 range, which we still expect to hold near term.”
Hantec MarketsCommenting on the current technical setup for the
Pound-to-Dollar (GBPUSD) exchange rate, Hantec Market’s Richard Perry expects consolidation for the cross as indicators turn neutral with Brexit developments likely to prompt the next significant move for the cross.
Perry wrote “Momentum indicators also have a stable look to then now with the RSI and Stochastics slowing their slide. There is an increasing consolidation look to the market now and this is coming under the $1.3000 psychological level and around a clutch of broadly neutral moving averages. Hourly momentum is very neutral now and the market is awaiting its next (likely Brexit related) signal.”
- CommerzbankCiting a losing of the gap in terms of probability between deal and no-deal Brexit scenarios, foreign-exchange strategist, Thu Lan Nguyen at Commerzbank suggested a resolution to the current Brexit impasse could see the Pound Sterling (GBP) rates move by as much as 20% in either direction.Nguyen wrote that the Pound Sterling is “probably the worst currency to trade at the moment,” adding “The probabilities of a no-deal Brexit and a deal are very close to each other, so we will definitely get a large move once there is a decision for either one.”
- Credit Agricole SAGiven an upbeat outlook on the UK’s exit from the EU, i.e., expectations of a benign outcome, Credit Agricole are bullish on the Pound Sterling – recommending a six-month call spread for the GBP/USD, targeting a move toward $1.37 – a near 6 percent appreciation from current levels.Head of G10 currency research at Credit Agricole, Valentin Marinov wrote “Clients still seem willing to participate in the game of chicken that the U.K. and the EU politicians have been playing,” adding “It seems that investors are still far from panicking.”
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