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.
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.