UK: Shift in the position towards an ‘economically rational’ Brexit - ING

Theresa May’s speech in Florence last week signalled a shift in the UK’s position towards an ‘economically rational’ Brexit – one that seeks to reduce some of the medium-term economic uncertainty clouding GBP markets, according to analysts at ING.

Key Quotes

“This can only be good news for a significantly undervalued pound – although any potential upside may be less imminent and obvious at this stage. While the merits of a two-year transitional period pose upside risks to our GBP forecasts, we note the finer details – such as the exact budgetary and judiciary conditions of any transition phase – still need to be ironed out. Michel Barnier’s response to the Prime Minister's speech suggests that this could be one of the focal points of this week's fourth round of Brexit negotiations – and therefore we still retain a constructive GBP outlook in the near-term.”

“Both the BoE's Carney (Thursday) and Broadbent (Friday) will speak this week and may look to reinforce market expectations of a November rate hike. We expect GBP to remain highly sensitive to UK data in the near-term as every release will either corroborate or contradict the BoE's hawkish stance; the week ahead sees the final release of 2Q GDP (Friday), as well as consumer and business confidence surveys. Moody's downgrade of the UK's credit rating to Aa2 on Friday (with the outlook 'stable') brings it in line with S&P and Fitch; we expect any GBP fallout to be limited given that the structural reasons cited for the downgrade – both weaker UK public finances and lower potential UK growth in a post-Brexit world – are in our view already reflected in sterling's price.”