“After weeks of tough rhetoric pushing GBP into a trading environment closer to an EM than a DM environment, the government may aim to stabilise markets, with its rhetoric and suggestions now possibly shifting in tone. However, there is a fine line to walk as Theresa May’s Conservative party wants a clean split from Europe. In addition, giving in too much, even before Article 50 negotiations have started, shifts the negotiation advantage towards the EU.
Hence, the GBP rebound should be limited and followed by another decline. Bear in mind, it is the supply side of the UK economy what matters and here we stay decisively bearish. Despite the more balanced tone coming out of Downing Street the future stance of the UK in its relation with its main export partner – the EU – remains highly uncertain, keeping the variance of anticipated investment returns wide. It will be this uncertainty undermining fixed asset investment, reducing the growth potential of the UK economy, which is not a good outcome for a country with a record 6% current account deficit.
Trading GBP Rebound: GBP is set for a short covering rally with the combination of bearish GBP positioning and signs of the government rethinking its hard Brexit lines triggering the rally.
This correction has upside potential to 1.2685 taking the current news flow into consideration. Should the British government take additional steps leaving markets with the impression that EU market access returns as one of the government’s main objectives then GBPUSD has the potential of breaking 1.2685 targeting 1.3450″.
Copyright © 2016 Morgan Stanley, eFXnews
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