The Trade Week Ahead – Currency Point – GBP: where to now?

March 17, 2019

Two “meaningful” votes, one ‘no-deal’ vote and countless hours of debate has seen the Commons finally agree on one thing – a need for an extension of Article 50.

This had been the base case of our GBP trade and as expected Cable rocketed higher over the three days of voting. The question from a GBP point of view is what now for Brexit and what’s the trade?

First and foremost, I still hold a bullish view of GBP, the ‘Brexit’ discount in EUR/GBP is of particularly interest and one that catches most of my attention. So, although the ‘scheduled’ March events of Brexit are (for now) over. There is still so much to look forward too.

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Thus, what are the possible permutations on Brexit now?

With Article 50 now extended the rolling survey by Bloomberg of the global investment banks have Brexit moving towards ‘softer outcomes.’ i.e. customs union, single market membership et. al. Before Thursday’s vote a soft outcome included a second referendum however that was voted down by Parliament.

With the Second Referendum gone – there are some risk events that need to be taken into account the main one being the prospect of a general election. This would put the Brexit timeline into disarray and a huge downside GBP risk event.

However, what is currently being priced as the most likely permutation on Brexit is a ‘Third Meaningful Vote’ (a fairly large watered-down version of the current Withdrawal Agreement) with Brexit signed off by June.

There is a caveat here – Brussels. It has to first sign off on the extension and that means agreeing to pushing Article 50 out past its May European Parliamentary Elections. The catch here is how do they have the election when technically the UK will still be part of the union? Again, this has a GBP downside risk component.

Putting all the caveats to one side and Brexit continues to play out as expected EUR/GBP in my view is heading into low-80s as the Brexit shock of the past three years filters out.