'Vast' Upside Potential in Pound Sterling says Soc Gen’s Juckes


Societe Generale analysis of the Pound

Image © Mohamed Yahya, Reproduced under CC licensing conditions

- Sterling has potential to rise to 1.40 in event of a 'sensible' Brexit deal

- "UK/EU negotiations are going to look like a game of poker for the next few weeks"

- 'No deal' Brexit risks set at 25%

Significant upside potential lies within an undervalued British Pounds says an analyst with French lender and investment bank Société Générale, but near-term political angst has increased and will keep a lid on the currency's potential.

"There is vastly more upside to Sterling than downside,” says Kit Juckes, global strategist at the Société Générale London unit. "Sterling is still in real terms at extremely low levels."

The Pound is cheaper than it should be, anchored down by a Brexit risk premium, notably the fear of the consequence of a 'no deal' Brexit. Juckes believes this anchor will continue to weigh over the near-term as the EU and UK strive to find a compromise that is acceptable to the UK parliament.

"A fair price (for GBP/USD) if we canceled Brexit, is way the other side of 1.50," says Juckes. "If you get a soft-Brexit it is close to 1.40. It is probably 1.40 if we can get a sensible deal."

A ‘no-deal’ Brexit is still "significantly unlikely," and below 25% probability, says Juckes, although in the unlikely event such a scenario GBP/USD “will be lower,” says Juckes, in an interview with Bloomberg News.

This week has seen Prime Minister Theresa May indicate she will return to Brussels to seek a renegotiation on the Northern Ireland backstop clause contained within the Brexit deal she struck with European leaders last year.

May was boosted after an amendment tabled by Sir Graham Brady asking the government to renegotiate the Irish backstop won a majority.

The response from senior European officials and heads of state to the UK's desire to renegotiate the Irish backstop has thus far suggested May will make little progress.

"UK/EU negotiations are going to look like a game of poker for the next few weeks and the fear is that the UK has worse cards and a less adroit player holding them," says Juckes, in a note to clients dated January 31.

Yet, the bar to a Sterling-negative 'no deal' remains relatively high says Juckes.

“No deal only happens if the PM cannot get a deal and Parliament cannot force another vote through,” says Juckes. “If she gets nowhere with Brussels - with the rest of the EU - we haven't finished this game in Parliament yet, we come back every two weeks and play it.”

May will return to parliament on February 13/14 with another 'amendable motion' that will essentially provide guidance as to the state of negotiations. Parliamentarians will - as was the case on Tuesday - have the chance to once again submit amendments. We could well see another attempt by parliament to force the government to request a delay to Article 50.

Staring down the prospect of a 'no deal' the government seek a compromise with the Labour party who advocate a permanent customs union with the EU and, therefore, no hard border in Ireland.

A meeting between Prime Minister May and Labour leader Jeremy Corbyn on Wednesday was reported to have been constructive, with Corbyn saying the PM had "listened" to his views.

If the Prime Minister was not able to find sufficient common ground with Labour for the basis of a deal, the country would be faced with the threat of crashing out of the EU without a deal on March 29.

"For the sake of simplicity, we think ‘no Brexit' could get GBP/USD to 1.50, ‘soft Brexit' could get it to 1.40 and no-deal could get it to 1.20. Odds-adjusted I'm bullish, but the odds of a 'no deal' exit have increased," says Juckes.

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