EUR/GBP: In, out, shake it all about - Rabobank

In view of the Jane Foley, Senior FX Strategist at Rabobank, on heightened fears of a hard Brexit, GBP would move lower and on evidence that access to the single market could be retained, GBP would tend to push higher. 

Key Quotes

“The reaction of GBP to May’s comments yesterday can thus be easily explained.  That said, despite its overnight weakness, EUR/GBP remains well below the highs of October.  In part this is a function of a recent spate of reassuring UK economic data.  It is also related to concerns regarding the European political situation.”

“Opinion polls suggests that the far-right is likely to pick up more support in the Dutch, French and German elections this year.  That said, polls also suggest that moderate governments will prevail in all three countries.  Although European politics can be expected to be the source of volatility for the EUR this year, we also see scope for a relief rally – particularly after the second round of the French Presidential election on May 7 if Le Pen is pushed into second place.  On this scenario there is scope for EUR/GBP to head beyond the 0.88 area.”

“Last week’s publication of UK manufacturing, construction and services PMIs all posted stronger than expected results with Markit reporting that sterling weakness has continued “to be seen as a key driver of growth”.  Since Brexit is yet to begin, exporters can take advantage of the fact that the UK’s trading relationship with the EU remain yet unaltered.  Also, the low level of unemployment and the soft interest rate environment will also playing a key role in boosting activity in the UK.  While the performance of the UK economy in the past 6 mth has surprised many economists, risks to the outlook remark sizeable.  BoE Chief Economist Haldane last week stated that these better data had not led the Bank to “’fundamentally change its view on the fortunes of the economy looking forward”.  Also, the recently published annual FT survey of economists has found that the majority of economists are just as pessimistic about Brexit’s likely effect on the UK’s longer-term economic prospects as they were a year ago.”  

“Perhaps in contrast to the expectations of many economists post the referendum result, there has yet been no sign that consumers are bolstering their savings as a hedge against political uncertainty.  Instead, UK consumers have been willing to keep borrowing to extend their spending habits.  That said, increasingly inflation will be taking a bite out of consumers’ pay packets and this is a threat to consumption growth going forward.”

“This week earnings reports from a variety of retailers may offer fresh perspective as to how price pressures could form in the coming months.  UK trade data for November due in the middle of the week could offer an insight as to whether GBP is having an impact of export volumes while production data is expected to follow the brighter path drawn by PMI surveys.  Even if these data provide relief, we see GBP as remaining vulnerable to the UK political situation and favour selling GBP into rallies vs. the EUR with a medium-term target of 0.88.”