GBP: ‘Brexit’ update, risk-on and Weale all help the pound – MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 22, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the constant selling of the pound has finally abated with a number of factors at play.

    Key Quotes

    “Crucially, given our view that the building of a ‘Brexit’ risk premium explains a lot of the under-performance, yesterday we had an injection of caution in regard to a UK-EU deal being reached next month. France PM Valls has stated that there are no concrete proposals as of yet being discussed while PM Cameron stated that if there is not a good deal agreed, "he is not in a hurry".

    This looks like nothing more than some political haggling. If expectations on a deal were to rise further, it would undermine Cameron’s negotiation position given the political damage would rest mainly on his shoulders if a deal wasn’t reached. We doubt this will alter the ‘Brexit’ risk premium at this stage and concerns are likely to persist through to the EU leaders’ summit next month.

    The rebound for the pound is perhaps more related to the rebound in risk appetite. Given the large UK current account deficit, bouts of risk aversion have tended to undermine the pound, especially with BOE monetary policy expectations on the first rate hike now pushed into 2017.

    BOE MPC member, Martin Weale spoke yesterday and clearly indicated he may be mulling the option of joining Ian McCafferty in voting for a rate hike. He argued that pay is being held down by factors that could turn suddenly - energy and food - and the MPC needed to be mindful of the potential turnaround. He also argued that the depreciation of the pound may "more than offset" the energy impact and add to inflation.

    However, we doubt Weale joining McCafferty in voting for a hike would have a notable impact on yields or the pound. We have of course been there before with both voting for hikes between August and December 2014. The remaining seven MPC members appear much more wedded to maintaining the status quo. The key there will of course be incoming data. Today Retail Sales for December will be released, which are expected to indicate a weak end to 2015.”
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