GBP: Unsustainable rebound
Another round of UK-EU trade talks starts today. As we discussed in Brexit returns as major headache for the pound, there’s little to suggest we should expect any real progress. The fading prospects of an extension to the post-Brexit transition period, and the risk of supply chain disruption at the start of 2021 (either without a trade deal or with a soft, narrowed deal), are to weigh on sterling in coming days and weeks. Although GBP rallied yesterday in line with the recovery in general risk appetite, the forthcoming UK-EU trade negotiations overhang should dominate and weaken GBP this month. We target EUR/GBP 0.91 by end June, with periods of GBP strength being unsustainable. Note that following the GBP rebound yesterday, only around 2% worth of risk premia is currently priced into GBP vs EUR based on our model. This is well below the 5% risk premium seen last August, suggesting further room for GBP decline.
