GS have a note out with updated Brexit views and also on euro / sterling
The bank have tried to simplify where to from here for Brexit
- Despite all the complexities of the Brexit process, the key question for the market is whether or not the UK government successfully achieves a deal with the EU that triggers the status quo transition period after March 2019. There are several possible outcomes and potential twists in the Brexit tale, but we think it is a useful simplifying assumption to calibrate our views in this stylised two-state world
There is, as you would expect, plenty of detail in the note even with the simplifying '2 state' world (Brexit with an agreement is GS 'base case', or without an agreement). In very brief:
- The underperformance of Pound and the decline in UK yields since the EU referendum is consistent with the macro adjustments that are likely under our base case, namely an adjustment in the current account and a decline in productivity growth.
- Beyond end-state considerations, the market is also pricing in transition-related uncertainty.
- An agreement similar to our base case should lead to a relaxation of uncertainty as well as a more full-throated pricing of a BoE hiking cycle. This should support GBP in the order of 5% stronger vs USD and EUR. We put these odds at 70%.
- Against this, failure to reach an agreement would raise the prospect of a sharp correction in GBP, likely through the lows of October 2016 towards 1.00 in EURGBP and 1.15 in GBPUSD. We think this is a 30% chance.
GS currency forecasts:
- We revise our official EURGBP forecasts to reflect a probability-weighted average of these outcomes, which results in a flat path at 0.90 for the next 3m, 6m and 12m. In other words, at current levels we see EURGBP as approximately fairly valued. However, in the absence of material news we would be inclined to short EURGBP above 0.90. Moreover, for investors who see lower odds of a "non-deal" outcome, there may be a case for Sterling length already.