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"Considerable Upside" for Pound Sterling vs. Euro and U.S. Dollar as 'No Deal' Brexit is unlikely: ABN Amro

Pound Sterling eyes British politics

Image © Melinda Nagy, Adobe Stock

- Sterling to remain 'relatively steady' until January 14

- ABN Amro give a boost to Sterling bulls at year-end

- Say 'no deal' Brexit increasingly unlikely

Theresa May has confirmed the vote on the EU-UK Brexit deal will now take place in the week of January 14 ensuring the British Pound should track sideways until the outcome is known.

May told parliament on December 17 that the vote will take place in the new year, giving a date that is just 7 days away from the January 21 deadline. The EU Withdrawal Act, which incorporates Brexit into UK law, requires the prime minister to give an update on Brexit by January 21 if her deal is rejected or if talks with the European Union break down.

"From here, the Brexit story cannot move on to next chapter until deal rejected, or passed," says Robert Howard, an analyst on the currency desk at Thomson Reuters. "This uncertainty may keep GBP relatively steady thru year-end, if not January 14."

We would expect Sterling to make substantial moves as it becomes clearer around this time which way Brexit will swing.

ABN Amro - the Amsterdam-based lender - have told clients they see considerable gains in the British Pound on the horizon, on the basis that a 'no deal' Brexit will be avoided.

"The likelihood of a no-deal Brexit has fallen significantly," says Georgette Boele, Senior FX Strategist with ABN Amro, "we believe markets are underpricing, perhaps significantly so, the higher chance of a more positive scenario."

ABN Amro, who were at one stage part of Britain's RBS, are eyeing the potential failure of the EU-UK Brexit deal in the UK parliament as a catalyst towards a soft Brexit, or even a 'Bremain'.

Any defeat leaves Prime Minister Theresa May with "two unpalatable options" says Boele: a general election, or a new referendum. "We think a new referendum is more likely – with the option of May's deal or Remain," says Boele.

The parliamentary vote must take place before January 21 and most political commentators and analysts are in agreement that in its current form it will fail to pass.  

"While it is hard to know the precise course of events, one thing we can say with certainty is that there is no majority in parliament for a No-deal Brexit, and there also appears no appetite in the government for it either," says Boil.

ABN Amro see a revocation or delay to the Article 50 process now being inevitable.

Taken together, ABN Amro now put the probability of an orderly Brexit at 45%, a disorderly Brexit at 15% (previously 35%) and no Brexit/Remain at 40% (previously 20%).

"As such, we believe markets are underpricing, perhaps significantly so, the higher chance of a more positive scenario. Speculators hold sizeable net short Sterling positions. These will likely be closed as the range of options available to the government narrows and coalesces around more benign scenarios," says Boele.

ABN Amro continue to see the Pound-to-Dollar exchange rate moving higher, hitting 1.36 by the end of the first quarter 2019, 1.28 by mid-year and reaching 1.45 by end 2019.

The EUR/GBP exchange rate is forecast at 0.86 for all these three periods, giving a Pound-to-Euro exchange rate of 1.1627.

This represents a similar forecast profile to that of Julius Baer, as reported here, while it is well above the consensus estimates made by nearly 50 global financial institutions. For a view at the 2019 consensus forecasts for GBP/EUR please see here, for GBP/USD, please see here).

"It is likely that in case of a Bremain, sterling will rise more than in our base case scenario," says Boele.

And, in the event of a 'no deal' disorderly Brexit, AMB Amro have a warning:

"In case there were to be a disorderly Brexit, sterling will not only fall because of uncertainty but also because we expect a sharp slowdown in growth and a sharp increase in inflation. Then the growth/inflation mix will deteriorate sharply and real yields will fall. This is the worst possible combination for Sterling."

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