GBP: Mismatch between UK & EU goals points to political stalemate - ING

According to the analysts at ING, a simple application of game-theory would suggest that both sides seeking to run with their own agendas – and trying to maximise domestic gains – will only lead to a sub-optimal economic outcome for both the UK and EU in the short-term and will hurt GBP.  

Key Quotes

“There’s nothing stopping GBP from trading with a 5% short-term risk premium in a throwback to price action seen in October 2016 (after the Conservative party conference).”

“Given that the UK has more to lose from a ‘cliff-edge’ Brexit, GBP markets would have to bear the initial cost of this lack of clarity. The risks are that prolonged uncertainty over the UK investment climate leads to a more permanent loss of investment – requiring further downward GBP adjustment.”

“This is the scenario that we think will take GBP/USD below 1.20 – and EUR/GBP up to 0.90 – this year.”