GBP/USD: Market is too downbeat on a potentially good outcome – Standard Chartered

Analysts at Standard Chartered see the GBP/USD pair could rise to 1.40 by year-end if the United Kingdom and the European Union strikes a deal. Their base case is for a Brexit deal. 

Key Quotes: 

“Almost halfway through the transition period, there is not much to show from UK-EU negotiations. Deadlines for reaching an agreement on financial services equivalence and extending the transition period have elapsed, and with COVID-19 still taking up much of the political and bureaucratic bandwidth of policy makers on both sides, time is tight for a new UK-EU trading arrangement to emerge by the year’s end.”

“Even if a deal does emerge, we are looking at new trading frictions emerging in 2021, and in a no-deal outcome, the economic impact is likely to be more significant. From an FX perspective, we think the market is too downbeat on the potential for a ‘good’ outcome: a deal or extension of the transition period. We forecast GBP-USD at 1.40 at year-end based on a good outcome (and EUR-USD 1.16). In a ‘bad’ outcome – no deal - we could see both GBP and EUR trade to 1.10 versus the USD (and hence EUR-GBP to parity).”