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Benign Brexit Outcome Most Likely; Pound to Strengthen, Says Bank of America

Developments this week make a “benign Brexit outcome” the most probable and offer reason enough to be favouring British pound appreciation for the foreseeable future, analysts at Bank of America Merrill Lynch have said.

Posted Mar 26, 2019

Brexit continues to dominate among influencers of pound exchange rates.

With Parliament taking control of affairs via a late Commons vote on Monday and now committed to a round of “indicative votes,” all roads point to a softer Brexit, analysts say, and this favours higher sterling exchange rates.

Britain’s currency is back trading at US$1.32 this week, and against the euro, at €1.17. It had been as weak as US$1.30 and €1.146 last Thursday when it wasn’t clear whether the UK would be granted any extension at all beyond March-29, no matter how short.

In a note on Tuesday morning, MUFG wrote that the two most likely outcomes from here are “no clear majority for a single outcome [following indicative votes], which would extend the current deadlock, or that a majority of MPs back a softer Brexit.”

Despite remaining the legal default, a no-deal Brexit is close to being off the table—“Mr Brexit” himself, Nigel Farage, admitted as much on LBC radio on Tuesday morning—and this, Bank of America Merrill Lynch says, means currency speculators should be betting on pound appreciation.

“Cost-benefit analysis of the key players suggests that a benign [Brexit] outcome remains likely. We recommend investors look to add to long GBP positions on dips,” BofAML said.

In agreement are technical analysts at Commerzbank. In a Tuesday note discussing EUR/GBP, the German bank’s chief technical analyst Karen Jones said there “is a risk of a slide to the 200-week Moving Average at £0.84,” thereby implying GBP/EUR rates in the €1.19s—levels not seen since May 2017.

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