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Big Bank Rolls the Dice on British Pound, Is a Buyer Ahead of Crucial Brexit Vote

Credit Agricole is seemingly rolling the dice on the British pound ahead of a hugely important vote in the House of Commons on Tuesday—a vote that will likely shape the nature of Brexit. Via the options market, the French bank is betting on an increase in the pound’s value.

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Analysts at the investment banking arm of Credit Agricole have argued that the British pound, which ended last week buying $1.273, is well below long-term fair value, which they see as $1.39.

“[We] prefer to express a medium-term recovery in GBP/USD through options,” the bank’s team wrote on Friday. To clients that are so inclined, it advised buying a 6-month 1.37/1.39 call spread for an indicative cost of 0.35 percent.

Credit Agricole appears to be going out on a limb given a very real possibility of British MPs rejecting Theresa May’s proposed withdrawal agreement.

Given EU negotiators’ insistence that this is the last and only deal on the table, to reject it would be to put the UK firmly on course for “no deal” and would undoubtedly spark significant sterling volatility and further depreciation.

The Bank of England has already warned of massive currency losses should the UK exit the EU without a deal, which is to say that it exits on WTO trading terms. Only 10 days ago, the BoE forecast sterling losses between 15 and 25 percent should no-deal come to pass.

Sterling is already under the cosh. Against the dollar, major support is now in place just half a percent lower at $1.266. To break that level would take the currency to a 17-month low and would add significant technical selling pressure.

Against the euro, at one stage on Friday the pound traded at a 2-1/2-month low of €1.115, before recovering slightly to end the week at €1.118.

Against all major currencies, the pound had been worth between 10 and 17 percent more immediately prior to the UK’s referendum on EU membership, which took place on 23 June 2016.

“It’s highly unlikely that [May’s] deal will pass because it’s being attacked on many different fronts by many different groups,” former British Prime Minister Tony Blair told news agencies this week.

Credit Agricole is undeterred by pessimism. Eventually, it expects a deal of sorts to be struck, and although it advises caution, it maintains “a relatively optimistic [sterling] outlook.”

 

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Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 

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