Lot of bad news priced into GBP - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, Without doubt there is a lot of bad news priced into GBP.  This suggests a fast compromise on the Brexit bill has the capacity to trigger some short covering. 

Key Quotes

“That said, the outlook for the UK economy is heavily dependent on the trade relationship that will be in place between the UK and the EU.  May’s outlined in January that her starting point was a hard Brexit followed by a new freetrade deal with the EU.  However, insofar as May has ruled out acceptance of free movement of EU citizens, it seems unlikely that the EU would accept such an arrangement.  In January UK Chancellor Hammond threatened to change the UK’s business model if the country were denied access to the single market after Brexit.  His remarks were made in response to the suggestion that the UK could become the tax haven of Europe.  However, irrespective of the impact that this could have on UK-EU relations, this is unlikely to sit well with PM May’s attempt to attract the support of disillusioned Labour party voters in the UK.”

“It is widely recognised that the complexity of trade negotiations means that these talks are set to be lengthy.  Even PM May has recognised that only a framework is likely to be in place by the end of the two year Brexit process.  Any delay to the start of these talks is likely to lengthen the period of uncertainty regarding the outlook for the UK economy and increase downside risk for GBP.”

“It is our view that there is too much optimism regarding US reflation priced into the USD.  Consequently, we expect a broad-based weakening in the value of the greenback in the coming months.  As a result we see limited downside potential for GBP vs. the USD and expect a choppy range to emerge around the GBP/USD1.22 in the coming months.  We expect EUR/GBP to push towards the 0.89 level by the end of the year.  We see GBP as more vulnerable vs. the EUR in part because we see scope for further short-covering in EUR following the spring elections in France, assuming that Le Pen fails in her bid for the Presidency.”