“We see a number of compelling factors for the short-squeeze positions on GBP. According to the indicators for the week ended October 18, short position on the currency peaked in April / May 2013.
Here are six more reasons to turn sentiment on the GBP:
- Improved economic growth prospects
GDP growth for the third quarter exceeded expectations, and forecasts on the growth of the UK economy have been revised from 1.7% to 2.0% and from 1.0% to 1.4% for 2017. Inflation forecasts of the Bank of England, also rose to 2.2% and 1.4%, respectively. Other banks also followed suit, and the appetite for selling the pound should gradually go into decline.
- Nissan is investing in the expansion of production since 2019
This means that the fears of a “hard Brexit” can be exaggerated. Most of the exports of the company (55%) comes from the EU. If the prospects of Britain losing access to the single market would be so real, long-term investments of Nissan would have no meaning.
- The growth of foreign demand for British government bonds
One reason for the weakening of the pound was considered a decrease in investor interest in the British securities, due to the risks entailed in the country’s exit from the EU. However, according to the Bank of England in September, foreign investors bought government bonds in the amount of GBP 13.3 billion, the highest since November last year.
- Payments to the EU budget
According to analysts, the British authorities will try to conclude an agreement under which payments to the EU budget will continue to be carried out. The concept for the country Brexit meant taking over the legislative powers of the European Court of Justice and the return of control over immigration flows. The question of the cessation of payments to the European budget is not even raised.
- Recovery of the banking sector supports the GBP
The pound will be supported by the recovery of the banking sector shares. The share of the financial services sector accounts for a large share of GDP and the current account deficit financing provides stability in the banking sector.
- The Court ruled on a case against Parliament
The decision, according to which the EU’s official exit process can be started without a vote in Parliament, also calls into question the prospects of weakening pound. Of course, the decision of the court cannot prevent Brexit, but we should not forget that Parliament can appeal to the Supreme Court, and ensure the right of taking part in the procedure of exit from the EU “, – said BTMU.
“What are the prospects for GBP/$ in the case of hard Brexit?
Sterling can lose 20-40% in relation to the marks before the referendum, and the GBP/$ reaches 1.10.
What is the probability of hard Brexit?
Prime Minister Theresa May assured that the official procedure for exit from the EU would be launched by March 2017. We expect that the market will allow for a higher probability of “hard Brexit” and maintain our short-term target at around 1.20 on the pair GBP/$.
The court’s decision that for the start of the process of exit the ratification by Parliament is unnecessary reduces the chances of an aggressive form of Brexit. GBP/$ could reach 1.26 in the short term.
The ratio of the risk-profit has inclined downwards, as economic forecasts are to weaken and we should expect further easing by the Bank of England.
The overall picture suggests a further decline in the pound, taking into account that in trade-weighted terms, it fell by only 14%, against 20-40% of our target range”, – concludes GS.