GBP swings on article 50 uncertainty and rising inflation - ANZ

Brian Martin, Head of Global Economics at ANZ, notes that the High Court’s ruling that the government needs the support of Parliament before triggering Article 50 has provided GBP with some support as expectations of a hard Brexit have stalled for now.

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“The government will appeal the decision and the Supreme Court will hear the case in early December. PM May has said she is confident of winning the appeal.

Given the current political vacuum, sterling may recover further as the market trims back expectations over the appropriate risk premium.

Sterling has also benefitted from the BoE’s upward revision to its inflation forecasts and moderate growth outlook in the coming years.

Our expectation that sterling would trade in a 1.20-1.25 range over the next six months or so might be vulnerable to a more sustained topside break driven by expectations of potentially greater balance returning to the Brexit debate. We therefore see upside risks to our current sterling forecasts of 1.25-1.30 vs USD in the coming months, but would be hesitant to get more bullish that that until the political and legal framework becomes clearer.

In our opinion, sterling could react very positively to indications of a softer Brexit, so the politics needs to be watched very closely. That would also allow the market to refocus on the encouraging economic environment since the 23 June referendum.”