OANDA Updated Q2 FX Quarterly Outlook: A patient period is upon us

GBP/USD – Brexit Hangover

The British pound was the best performing currency in the first quarter as the UK appeared determined to avoid a no-deal Brexit.  After countless failed meaningful and indicative votes, Brexit appears to be headed for a long extension, pending the EU’s approval, but it could be cut short if Parliament is ever able to agree upon an exit deal.

The British economy has felt the effects of Brexit, with many offices leaving and the uncertainty of future trade agreements crippling many businesses.  The longer Parliament struggles to make a deal, the longer we will see investors hesitate to invest in the UK.

The Bank of England quietly remains the most likely central bank to raise rates this year.  Even if we see the UK end up having a 9 month or longer extension, we could still see the BOE expectations call for a 25-basis point increase by the end of summer.

The currency outlook is just as complicated as the question as to how the UK will leave European Union.  In theory, the British pound should be poised for sunny days once a withdrawal agreement is in place, but the uncertainty of what type of trade deals will be made and when everything will take place could see some disappointment in currency moves.  Some analysts are targeting cable to rally to 1.36-1.40 on a deal announcement, but uncertainty remains high on if and when that could happen.  Risks are growing to the downside, but for now, there remains no base scenario on how this will turn out.

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