BNP: Focus on GBP upside risks

From the FXWW Chatroom: A UK panel of senior judges is scheduled to rule at 10:00 GMT today on a challenge to the government’s Brexit plan which seeks to force a parliamentary vote before invoking Article 50 of the EU Treaty. The ruling would be subject to appeal to the Supreme Court and, in any event, a Conservative majority in Parliament might well support the government’s plan to move forward. But in the short-term this could be a catalyst for a short squeeze in Cable back towards 1.28, particularly given broader pressure on USD long positions. The Bank of England meets today and publishes its quarterly Inflation Report. This was at one point viewed as a meeting at which the BOE might deliver further policy easing. However, with GBP weakness boosting the inflation outlook and helping data come in much better than the MPC had previously expected, steady policy is now anticipated. The GBP is now cheap relative to our long-, medium- and short-term valuation metrics (see chart) and GBP weakness is already impacting the UK monetary policy outlook. With short positioning stretched (-36), there is scope for a GBP rebound on positive news surprises.

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