GBP showing immunity to negative Brexit headline risks - ING

According to Viraj Patel, Research Analyst at ING, signs of Brexit nerves in markets have become more evident this week – with GBP/USD trading at a 1.0-1.5% discount relative to ING’s short-term financial model estimates (which based on relative interest rate differentials, relative domestic risk gauges and proxies for global risk points to a fair value for the pair in the region of 1.40-1.41).

Key Quotes

“In a way, it is completely understandable to see GBP trading with a short-term Brexit risk premium – not least when investors are confronted with headlines stating that there are still ‘sticking points’ between the UK and EU in regards to a transition deal. But whether it’s Brexit fatigue, the Divorce Deal precedence of a last minute agreement or ‘FOMO’ over missing out on a positive re-pricing of Brexit risks, the pound’s relative resilience – noting the stability in EUR/GBP within the narrow 0.87-0.89 range – is quite telling of how investors may be less inclined to chase a negative Brexit headline.”

“The next few days will be a big test of this – starting today with the European Commission’s release of its first draft of the Brexit ‘Withdrawal Agreement’. The narrative that has been priced into GBP markets this week is one of no real Brexit consensus emerging between UK and EU officials – and so we suspect GBP, under this new Brexit trading environment, may be fairly immune to negative headline risks.”