There are just 200 days left before the UK leaves the EU and – at this moment – we still we have no deal on the table, and yet it is a vital time for the future of the British pound. During the first couple of weeks of September bullish bets on sterling increased as the EU’s chief negotiator Michel Barnier struck a more optimistic tone. Barnier was quoted as saying that a deal was possible “within 6 to 8 weeks” citing the Irish border as the only obstacle. Recent news leaking from Brussels, backed the bulls, suggesting that that European leaders have finally decided to offer British PM Theresa May the “soft” kind of Brexit she wanted all along.
So where does this leave the pound? We believe that a degree of caution is still necessary but we are starting to feel more optimistic. Our base scenario calls for the EU to finally strike a deal with the UK which will allow for a smooth exit and greatly benefit the domestic currency. At the time of writing, cable is trading around 1.3150 and our short-term target lies at 1.32, which we believe would be reached soon. For a further extension to the upside concrete news of an agreement is needed and we think the odds are in favour of this scenario. Should this be the case, sterling will be extending its gains as speculators, who are shorting the pound, will rush to cover their positions quickly propelling prices higher. Our medium-term target stands at the 1.3450 area and this level almost coincides with a 50% recovery from the sell-off seen since April until August.
However, there is room for a bearish scenario as well. The only common factor in the negotiations so far is that nothing has been agreed. A bearish scenario would include a complete breakdown in negotiations or, even worse, PM May losing control of her administration and hard-line Brexiteers like Boris Johnson taking over. This would be catastrophic for the pound and August’s 1.27 lows would be the area of focus to the downside as short-sellers would immediately add on their speculative shorts and confidence in the pound would collapse. Let’s hope for the UK’s sake that BoJo is not the way they go