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GBP flying high – BBH

Prospects of a deal with the EU has sent sterling to its best level in two months against the dollar as it reached $1.3430 in early European turnover, explains the research team at BBH.  

Key Quotes

“It had sunk to nearly $1.3220 yesterday as European markets were closing, which was a four-day low.  It is the strongest of the major currencies today, gaining about 0.4%.  With today's gains, it has met our retracement target near $1.3415.  The momentum appears to give it potential toward $1.3500 in the near-term.”

Sterling has been trending higher since the middle of the month, largely as a function of the broad dollar weakness.  However, the move over the past 24 hours is due solely to reports that suggest the broad terms of the financial agreement has been reached.  The UK will pay 45-55 bln euros and may have contingent exposure for that amount again (total as much as 100 bln euros).  EU negotiators are warning that a final agreement on funds has not in fact been reached.”

The Irish border issue has not been addressed.  There is a sense that some minimum effort by the UK on this in the coming days will suffice for the EU, and Ireland would be understood to be under pressure to accept.  That does not mean that the Irish will capitulate, and the issue is additionally complicated by Prime Minister May's reliance on the Democrat Unionist Party after having her parliamentary majority.”

The increased possibility that a broader Brexit agreement will be achieved (that is to say the UK will leave with an agreement in hand that will less destabilizing) appears to be impacting perceptions of monetary policy.  Investors have pushed up the implied interest rates in the short sterling futures market, with the term steepening.  It appears that another rate hike is being priced in for Q4 18.  Recall that when the OECD revised down UK growth forecasts earlier this week, it emphasized the uncertainty over Brexit.  While the agreement on the financial obligation is important, many hurdles and uncertainties remain, suggesting expectations may be volatile.”  


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