GBP View: FXWW

From the FXWW Chatroom – Sterling’s fall vs EUR is likely to extend. The risk for a “no-deal Brexit” has increased in recent weeks, UK fundamentals remain weak and there is a lot to worry about and little to look forward to over the coming months. We remain bearish on the pound and expect that it will slide further vs EUR to 0.92 by year-end and 0.95 by end-19.The BOE is now priced to stay on-hold for around one year, in line with the Bank’s own guidance. Admittedly, the UK’s uninspiring macro performance has not prevented the MPC from lifting the Bank Rate twice since last November. Arguably, however, the bar to this happening again is higher going forward.On the one hand, the economy is likely to continue to underperform. Global cyclical tailwinds are stalling, inflation is falling faster than the MPC previously envisaged and domestically generated inflation remains subdued in our analysis. In addition, Brexit-related uncertainties are likely to continue weighing on activity for a while longer in most scenarios.At the same time, Brexit event risk is ample until March 2019 as decision time on the Withdrawal deal looms large. Increased odds of a “no-deal Brexit” and domestic political uncertainty do not bode well with sterling continuing to price relatively little idiosyncratic risk-premium. In addition, sterling’s unfavourable valuation starting point – c. 15% overvalued according to our FEER model – suggests that the bar for further weakness is not particularly high. (UBS)

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