The British Pound continued to be the best performing major currency on Thursday, as GBP/USD x-rate rolled up towards 1.30.
There was no obvious driver for the newfound optimism, but analysts at ING believe that the risks of a no-deal falling could be what has helped the Pound-to-Dollar and Pound-to-Euro exchange rates break out to the upside.
Analysts at Scotiabank are less optimistic, as they actually see a limited appetite from May to compromise and therefore belief that a hard Brexit is now more likely than it was before the Withdrawal deal was voted now.
Pound Sterling Today: ING believe no-deal risks are falling, Scotiabank disagree
The British Pound (GBP) continued to rally on Thursday, soaring higher on an otherwise extremely quiet day of trade in FX markets.
The Pound to Dollar exchange rate (GBP/USD) continues to soar in what has all the hallmarks of a short squeeze.
Cable is now approaching 1.30 after just a few weeks ago having plumbed the depths of the 1.24 handle.
What has caused the rally? Well, the catalyst certainly appears to have been Theresa May’s deal getting rejected, but there has been little material change to the situation.
Instead, the path of least resistance has clearly moved to the upside and the market positioning is probably only serving to accelerate the price action as investors speculate on a more bullish outcome for Brexit.
The Euro to Pound exchange rate (EUR/GBP) has also been accelerating in the GBP’s favour.
Positioning had also been skewed heavily against the Pound in this pair, and given that it is far more significant to the exchange weighted GBP, it is the more effective Brexit “barometer” than GBP/USD.
Certainly, the winds have changed in the market, but don’t be surprised if the markets pull the rug once the excess shorts are consumed.
May’s willingness to compromise may be helping Pound Sterling
As everyone scrambles for a fundamental reason that the Pound is taking off, ING’s report on Sterling focuses on their belief that the most likely outcome from Brexit continues to improve.
Public opinion, as well as the majority in Parliament, want at most a soft Brexit and it seems like Britain’s democracy is winning out. Analysts at ING believe that it is May’s penchant for deal-making that is driving the current brightening mood,
“While the failure of the no-confidence vote was largely expected, sterling continues to reap tentative benefits from modestly shifting probabilities of the Brexit outcomes. On the latter, with Prime Minister Theresa May’s willingness to move closely towards a cross-party deal (although whether this will be achieved is still uncertain) as well as growing opposition towards a hard Brexit, the odds of a more market-friendly outcome are rising.”
ING’s fair value estimate actually is a little bearish for Sterling compared to the current level for EUR/GBP. A good example of how markets are probably getting a little ahead of themselves in the near term,
“Indeed, compared to the start of the week, our probability-weighted outcome for sterling has improved (although only modestly), with the EUR/GBP probability-weighted fair value declining from 0.90 prior to the meaningful vote to 0.89 currently. The latter is clearly not far from the current spot level.”
Ultimately this leads ING to take the point of view that there could now be a floor under Pound exchange rates so long as the barometer doesn’t swing too far towards no-deal again,
“As we have argued previously, our base case is for an extension of Article 50 and the rising perceived market probability of such an outcome should, in turn, keep GBP away from this year’s lows.”
Sometimes the best trends start for apparently little reason and it could be that there is a good amount of upside in Sterling before the fundamentals even start to reflect the price. One thing is for certain, and that is the markets are happier to see Parliament deciding Brexit than they are for May and her office to be deciding it. The more safety amendments that MPs pass, the more confident the bulls may get.
UK data back in focus
As foreign exchange markets have been so fixated on the drama of Brexit it could have been easy to ignore the fundamental data.
We had the CPI earlier in the week softening once again, but looking relatively firm in the underlying metrics even if headline continues to drop with energy prices.
Scotiabank used their FX report on Thursday to bring attention back to the damage that has been done to the once mighty UK housing market,
“RICS data reflected a deepening slide in housing sentiment (prices and broader optimism among estate agents) through Dec; near term sales expectations fell to a record low and the RICS index of prices dropped to the lowest since the financial crisis. Brexit is partly to blame at least, of course.”
Scotiabank is not completely ignoring Brexit however, bringing attention to the all-important plan B which will be scrutinised next week.
They actually have an alternate idea to ING, believing that No-deal risks are in fact increasing and not receding as many in the market appear to believe,
“High political drama returns shortly, however, with PM May announcing her plan B next week and parliament having another go at voting on it at the end of the month. Reports so far on the PM reaching across party divides suggest little desire to alter her plan significantly and no desire to extend Art. 50. This rather suggests that ‘no deal Brexit’ risks are perhaps rising.”
It is hard to disagree with Scotiabank’s comments that risks could be rising. Indeed we could actually have a situation where both the positive and negative outcome for Brexit could be increasing in probability.
Speculation for the upside, therefore, makes sense now, while there is more juice to squeeze in the short-term.
These gains are hard fought for the Bulls but they have had their hearts broken before in the post-Brexit GBP and there will no doubt be a lot of edgy traders ahead of Tuesday’s announcement about a plan B.