GBP: UK political impasse wreaking short-term havoc – ING

“GBP/USD’s slide from 1.32 towards 1.30 was largely a US dollar story – and to a lesser extent a Brexit impasse story (this was largely in the price at the start of the week),” argue ING analysts.

Key quotes

“As another crunch EU Council meeting comes and goes without an agreement, the critical issue of the Irish backstop – the insurance policy that would kick in in the event of the UK leaving the single market and customs union – remains unresolved. UK data was also mixed – and this didn’t help GBP’s cause (despite wage growth ticking up to 3.1%). All of this leaves GBP/USD sitting at a crucial Brexit inflection point around the psychological 1.30 level – which is likely to now be a gauge of market sentiment.”

“The slippery slope of a May leadership challenge, no Tory front-runner, calls for a general election and UK political impasse at a crucial juncture could come back on to the table and tip GBP/USD below the 1.30 level in the coming week – though it’s getting pretty hard to make a solid forward-looking assessment of these short-term UK political risks (sentiment seems to be shifting every day).”

“Our economists make the point that as Brexit negotiations stall, the ever-increasing uncertainty surrounding ‘no deal’ could see businesses take more concrete action and consumers turn even more cautious. For the Bank of England, this makes a rate hike unlikely before March 2019. They do not know for sure whether a ‘no deal’ will be averted until much closer to the UK’s scheduled exit date (29 March 2019) – although we feel GBP markets will have a good sense of where things are going sooner rather than later.” 

“That suggests we’re in a big move over the next couple of months (2M GBP/USD volatility particularly elevated relative to the rest of the term structure) – with the relative outcomes pretty binary: ‘deal’ seeing GBP/USD above 1.35 and ‘no deal’ seeing GBP/USD below 1.25. For the time being, with sentiment shifting every day – we doubt that spot investors will collectively be willing to chase a bearish GBP story. We suspect GBP/USD remains at a neutral point (1.30) – while bouncing around either side of that until we get clarity. The week ahead sees some BoE commentary (Haldane and Carney – both Tue) – though we doubt comments will shift short-term GBP sentiment too drastically.