While there have been warning signs on the UK economy, political outcomes regarding Brexit dominate the outlook for the pound, explained analyst at Rabobank. They noted GBP has been testing key technical levels.

Key Quotes:

“In recent sessions, cable traded below the December 2018 low of 1.2478, reaching levels last seen more than two years ago before bouncing back. If a break below this level is sustained, from a chartist’s perspective, this would put the GBP/USD 1.2351 level in view.”

“If Johnson is confirmed as UK PM next week, GBP would be at risk of weakening. His rival, Hunt, is likely to be greeted a little more favourably by UK investors due to his more pragmatic view on the October 31 Brexit deadline. Even on the scenario of a cliff edge Brexit being avoided this year, UK investors will have to cope with the legacy of Brexit on the political system. A delay to Brexit could result in the Tories limping into the next election.”

“Our central view that Brexit will be delayed beyond October this year suggests that GBP will likely retain some poise in the months ahead. That said, kicking the can down the road is clearly not a solution and will serve to prolong uncertainty and act at a continued drag on investment. This means the permanent costs to the economy could become more marked. We forecast EUR/GBP at 0.87 and GBP/USD at 1.30 on this scenario on a 6 month view.”

“If a deal is done in the next year or so, we see scope for EUR/GBP to return to the 0.83/0.83 region and for cable to trade around 1.39. This assumes no general election. On a no deal Brexit, we see risk of EUR/GBP rising to parity and cable dropping to the 1.12 area.”