GBP: The Pound Another US Dollar; Where To Target? - BTMU
We expect Brexit developments to again dominate pound direction this year but expect a much better performance for the pound than the current market consensus.
Firstly, the requirement of the government to involve parliament in setting its Brexit negotiation plans reduces ‘Hard Brexit’ risks with the pro-Brexit members of the government now curtailed by a pro-EU parliament. Secondly, there have been comments made suggesting a ‘softer’ more palatable Brexit is desired, not just from the UK but from the EU as well. Brexit Secretary David Davis stated in parliament that the UK could continue to pay into the EU budget in order to obtain better access to the Single Market. EuroGroup head Dijsselbloem also stated that the EU could find a way for the UK to maintain access to the Single Market. With the triggering of Article 50 now widely expected, we doubt the pound will suffer greatly from that.
Second, Selling the pound on Brexit fears may also be tempered by having Donald Trump in the White House. The selling of the pound on trade uncertainty is no longer UK-specific with the US now promising to re-negotiate deals with many key trading partners. We believe with the US and UK economies at a similar point in the economic cycle and with the UK breaking away from the EU,
If that transpires we would expect to see pound strength more versus the euro as EUR/USD falls below parity in Q2 with GBP/USD becoming less volatile.