GBP: Finding a silver lining - ING

Analysts at ING explain that the GBP strengthened yesterday as FX market found a silver-lining in spite of the staggering scale of the loss and the Labour party triggering a no-confidence vote.

Key Quotes

“This is likely a function of (a) the rather low probability of today’s no-confidence vote being successful (as gauged by the comments from the DUP and the pro-Brexit European Research Group) and (b) the increased likelihood that the Prime Minister may have to seek cross-party support for the new plan, with the perceived odds of an Article 50 extension rising.”

“We estimate that the probability-weighted outcome for GBP has marginally improved - by one big figure for both EUR/GBP and GBP/USD based on our estimates. This is because the somewhat lower likelihood of an imminent early election, marginally lower perceived odds of a hard Brexit (given the opposition to it in parliament and more vocal talks about an Article 50 extension) and a rising probability of a form of deal eventually obtaining support in parliament (given that Theresa May may well now consult other MPs).”

“But while the probability-weighted outcome for GBP may have improved somewhat, and GBP dips may be now used by investors as an opportunity to close their existing shorts and/or embark on speculative (but still tricky) GBP longs, the near-term price action for GBP will still remain very bumpy. There is still a non-negligible probability of a hard Brexit (around 20% in our view), which would potentially be a detrimental outcome for GBP.”