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Pound Sterling a Buy against the Euro: Nomura

Pound Sterling

Image © Thomas Otto, Adobe Stock

- 'No deal' Brexit will be avoided say Nomura

- Say Pound Sterling a 'buy' against Euro

- GBP/EUR has insurance in form of 1.10 support level

Another global investment bank is seeing decent value in Sterling at current levels, particularly against the Euro.

Foreign exchange strategist Jordan Rochester with Nomura in London says he is a buyer of Sterling, saying the UK parliament will ultimately ensure the UK avoids a 'no deal' Brexit. On such an outcome, Rochester fancies the British Pound's chances against the Euro in particular.

"Over the next few weeks parliament is likely to attempt to find a majority in favour or against Theresa May’s deal. Rather than increasing the likelihood of a 'no deal' outcome, we expect either the deal to scrape through, owing to last minute concessions to the key Brexit groups, or if parliament forces the government to adopt a different or more market positive Brexit stance," says Rochester.

Sterling's ability to recover from dips below 1.10 against the Euro are a particularly encouraging signal argues Rochester. We have seen the Pound-to-Euro exchange rate fall below 1.10 on numerous occasions over recent months, but each test has proven short-lived in nature, confirming strong buying interest in Sterling at such discounted levels. "For many of those trading GBP/EUR 1.1000 is the base of their range," says Jeremy Boulton, an analyst on the Thomson Reuters trading desk. "1.1000 is 0.9091 (in EUR/GBP terms) and a wealth of non-speculative GBP demand is assured nearby."

The call by Nomura comes ahead of the UK parliament's vote on the Brexit deal reached between the EU and UK, set for January 15. The government is widely expected to lose the vote as the deal does not command the confidence of the full Conservative parliamentary party, nor does it find backers in Northern Ireland's DUP party which has to vote with the Conservative party for any legislation to pass through the House of Commons.

However, Prime Minister Theresa May told parliament on Wednesday, January 09 that talks with the EU to secure further concessions to help the deal pass are indeed ongoing. A number of analysts and political commentators argue any major concession from the EU to help the government secure the Brexit deal will only come at the very last minute, and this could be after the deal has suffered a first defeat in parliament.  "I've been in contact with European leaders ... about MPs' concerns. These discussions have shown that further clarification over the backstop is possible and those talks will continue over the next few days," May told parliament at the start of the debate ahead of the January 15 vote.

"Hope is a powerful thing and the risks are now skewed to the upside," says Rochester of the Pound's outlook. Indeed, Rochester reckons there is so much bad news already priced into Sterling values that it is hard for the currency to fall any lower. "It’s hard for GBP to weaken more from here."

Nomura say their trade recommendations on Sterling in 2018 proved particularly fruitful, buying the currency when sentiment reached its lowest ebb. They see buying GBP/EUR at around 1.1060 as being a strategy worth pursuing but warn trades should be exited at 1.0980 as this might suggest a larger decline is brewing.

As mentioned, the Nomura view is that the deal will pass through last minute concessions on Brexit and that a 'no deal' will be avoided. This assumption appears to be on the money as this week has seen the government suffer two defeat at the hands of parliamentarians looking to avoid a 'no deal' Brexit.

The British Pound was bouyed midweek after Conservative party MPs rebelled against the government to join forces with Labour to pass a rule that forces the government to come back to parliament with a 'Plan B' within a mere three days should the Brexit deal be rejected by MPs next week.

The government is expected to lose next week's meaningful vote on the Brexit deal struck between the UK and EU back in October 2018, and rebels are hoping that the government might come back to parliament and introduce an alternative path forward to avoid a 'no deal' Brexit taking place in March 2019.

The defeat is the second suffered by the government at the hands of remain-leaning MPs in 24 hours, leading some commentators to suggest there is no parliamentary support for a 'no deal' to take place in March.

Analyst Viraj Patel, FX & Global Macro Strategist at Arkera says, "the Brexit amendments may have arguably reduced risks of disorderly GBP decline".

According to Patel, the three-day 'plan B' deadline limits lengthy political impasse, the majority of MPs would prefer a softer Brexit and the Finance Bill means no-deal Brexit is highly unlikely. "GBPUSD looks pretty cheap at 1.26-1.27," says the strategist.

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The call by Nomura is echoed elsewhere in the analyst community.

Pound Sterling is being tipped to move higher over coming weeks and end the first quarter of 2019 higher against the Euro than where it started according to forecasts from Goldman Sachs whose analysts say the UK currency will benefit when it becomes clearer a 'no deal' Brexit is avoided.

The Wall Street giant expect the Pound to be heavily influenced by political developments in the run-up to the March 29 Brexit day, with the first key test for the currency coming when lawmakers vote on the Brexit deal secured by Prime Minister Theresa May on January 15. May is expected to lose the vote and it is what comes next that is important for Sterling: the general rule-of-thumb being that a 'no deal' Brexit would likely trigger losses for Sterling while the reaching of a deal will trigger appreciation.

"We continue to expect that the current deal will pass in some form, with the rising threat of tail outcomes funnelling reluctant parliamentarians towards approval of the deal," says analyst Zach Pandl at Goldman Sachs.

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