GBP: Moving Towards A 'Hard Brexit'; Stay Short For 1.20 & Sell Any Rallies
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Since the Conservative party conference in Birmingham just under two weeks ago the market has progressed again through the five stages of “Brexit grief” into acceptance of a Hard Brexit.
The rhetoric from ministers with “red lines” on immigration has considerably lowered the possibility of a “Soft Brexit” in the market’s pricing and we have moved more towards the “Clean Break” or “Hard Brexit” outcome. With the market’s acceptance of this it has naturally seen GBP suffer. But it is more than just that. It has changed the dynamic we see between UK rates markets and FX that leads us to conclude that we have not yet seen the bottom in GBP, with portfolio inflows less likely to provide the necessary inflows to the UK to plug the current account deficit
We have strategically been short GBP all throughout this time initially targeting 1.25 in GBP/USD before the flash crash, then targeting 1.20 in its aftermath.
From these levels it is less attractive for some to enter fresh shorts, but given the new market dynamic we continue to recommend selling GBP initially to 1.20 and further and for EUR/GBP to break above 0.92.