GBP/USD: The outperformer toward the day of true Brexit – MUFG

The surge of the pound on Monday was a reflection of the more positive mood-music as the Brexit talks kicked off. Economists at MUFG Bank forecast the GBP/USD pair sckyrocketing to 1.35 in the last quarter if a deal is reached. 

Key quotes

“We have always assumed that a deal would be finally done but that it would probably extend beyond the mid-October deadline. PM Johnson’s spokesman, James Slack stated yesterday that he expected talks to extend beyond this week and there is a chance now that talks could continue through to the EU summit. If that’s what happens there is every chance that expectations could rise further of a deal being reached at the final hours of the EU summit as we have come to expect of EU summits. But comments like being in the ‘final stages of negotiations’ certainly paints a brighter picture of a deal being done and that hope could well extend GBP gains further this week.”

“Something on fishing rights for something on state-aid independence seems the logical course of direction in negotiations and given the political capital that PM Johnson is losing in the fight against COVID we see the balance as having shifted more in favour of a deal. However, how extensive that deal is and how it alters economic ties will only be known once we get greater detail.”

“Our current forecasts see GBP advance up to around the 1.3500 level on a deal being reached in Q4 only for GBP weakness to return in H1 2021 as the details of the deal and the fallout in the UK jobs market from COVID-19 prompts a reversal and with it the BoE cutting rates to zero percent.”