Although the British pound is above $1.30, unless you can afford to ride the wild swings in the currency, we would advise taking up a position given continued uncertainty over Brexit. We also extend this recommendation to UK equities and gilts.
We note the pound is undervalued against the dollar due to Brexit noise with our 12-month forecast remaining at $1.38. Over the next three months, we see GBPUSD downside risk and prefer hedging the pound given the level of uncertainty. EURGBP will stay range bound around £0.90.
Much of the pound’s recent gains against the dollar since the beginning of the year has come from a lower probability of a ‘no deal’ Brexit diminishing but also the probability of delaying Brexit. While extending Article 50 may result in the pound rallying (or even a second referendum), delaying Brexit is far from a solution by extending uncertainty and hard-line Brexiteers will not accept an indeterminate delay. Therefore, we see this current strength as short-lived.
If a conservative deal is struck and a transitional deal eventuates, we expect GBPUSD to jump towards $1.40 and EURGBP £0.85 with the Bank of England expected to resume interest rate hikes. The most negative of scenarios will see the GBPUSD weakening towards $1.15 and EURGBP £0.94 and the BoE keeping rates on hold.
At this point, market volatility in the pound will not subside until an actual outcome arises and urge caution in trading the pound and taking directional positions on UK equities and gilts as predicting what will happen next in the ongoing Brexit process is difficult to predict given the number of probable outcomes.