Despite Brexit talks between Brussels and London stalling on 14 October, a leading City analyst believes the downside risk to GBP remains limited as long as the rift between the European Union and the UK doesn’t widen any further.
In December 2017, the UK and the EU agreed on an Irish protocol with a backstop guarantee that there will be no hard border between Ireland and Northern Ireland. Almost a year later, this backstop solution and how to implement it in practice continues to cause trouble and pain as withdrawal negotiations move into the final stage.
In a note to clients, Richard Falkenhäll, senior currency strategist at Nordic Bank SEB, said: “The British government and Prime Minister Theresa May were given some time by the EU to think through the situation after the British decision to disengage from talks on 14 October. Given the negative development over the weekend, the GBP reaction has been surprisingly muted.
“On Monday (15 October) afternoon, EUR/GBP was up by only 0.4% since Friday’s (12 October) close, and this morning (16 October) it has recovered most of what was lost over the weekend. This muted reaction shows that market players have learned the political tactics of the Brexit process.”
Falkenhäll said the fact that the British government and the EU seem willing to accept a backstop solution where the UK temporarily stays in a customs union to avoid a hard border represents significant progress in talks since the September Summit where the Chequers plan was dashed by EU leaders.
"This explains why the GBP has not sold off more than this despite the negative development this weekend. As long as the rift between the EU and the UK doesn’t widen further, the downside risk to GBP therefore seems limited."
SEB has revised its one-month EUR/GBP forecast lower to 0.89 and expects the currency pair to fall to 0.86 by year-end.
