The extent of the uncertainty that now clouds the UK’s economic and political outlook is hard to exaggerate. The Government is in limbo ahead of a Conservative Party leadership contest. The opposition is in chaos. The rest of the EU would like negotiations on the UK’s exit to begin but they have no-one to negotiate with. Uncertainty is negative for the UK economy, for investor confidence and obviously, for the pound.
Sterling has now fallen by 9% against the US dollar since the eve of the UK referendum, and we look for an eventual move in GBP/USD to 1.20- 1.25.
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EUR/GBP may well trade above 0.85 in the process, though the damage to the European economy shouldn’t be under-estimated. The Bund/Treasury spread, in real and nominal terms, isn’t pointing to Euro weakness yet, even as Bund yields head deeper into negative territory, but US yields are likely to stabilise before European ones and EUR/USD is likely to move down to 1.08 in the weeks ahead.