Brexit causes GBP further upside risk


27 April, AtoZForex, London – The GBP has been one of the best performing G10 FX currencies since the beginning of the week. With GBPUSD rising to its highest level since before the mid-February announcement of the Brexit referendum. Credit Agricole has stressed that GBP further upside risk has increased with room to appreciate towards the higher end of this year’s range, mainly on the back of easing Brexit fears and position squaring.

GBP further upside risk

A shift in market expectations after last week’s polling data reflects stronger momentum for the Remain campaign ahead of the June 23 EU referendum. The recent recovery in GBPUSD has coincided with a consolidation in the cost of insuring portfolios against substantial swings in the currency against the USD and EUR.

“We are seeing part of the relief rally come early,” said Jane Foley, currency strategist at Rabobank. “It is related to the opinion polls early last week that suggested that the Remain campaign had more momentum and the perception was that Obama’s contribution, even though it raised the hackles of the Leave campaign, most likely gave the Remain camp more momentum.”

While the most recent Brexit polls indicate a slight shift back to the Leave this week, betting markets have changed to the better. Following President Obama’s comments on Friday about the impacts of Brexit, saying that it could take up to 10 years for the UK to strike a trade deal with the US should it leave. As a result, the betting odds for a Remain result rocketed from near 65% to 73% on Monday.

Rising rate expectations

Somewhat lower Brexit expectations put the focus back to constructive domestic conditions. Stabilizing commodity price developments combined with firm domestic conditions might well make a case of a further improving price and inflation outlook, argues Credit Agricole, and that should ultimately drive rate expectations higher too.

“Rate expectations have been starting to rise already,” Credit Agricole noted, adding, “it is still early days and real demand is unlikely to return until a positive outcome in June. However, there is more room of short-covering related (GBPUSD) upside.”

Also see: Barclays: USD Bears after FOMC?

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