Bank of America Merrill Lynch Research discusses GBP outlook in light of the recent Brexit developments.
“The EU and the UK have avoided the worst case scenario of a no-deal Brexit for now and have extended Article 50 to October 31. Following the inability of the UK to agree on a Brexit plan, we had argued that extending Article 50 and participating in the EU elections was the best of three difficult options-the other two being to revoke Article 50 or exit without a deal. In this context, such a compromise is a positive development, but it only postpones the problem for few months. The UK can still exit earlier if the Parliament can agree on a deal, but can also exit without a deal after October. We would expect October 31 to be a hard deadline-unless a short extension is necessary to finalize an approved deal or allow for a second referendum,” BofAML notes.
We still expect logic to prevail and the UK to approve a deal and avoid a Brexit crash. However, we also have to acknowledge risks that brinkmanship could continue preventing a compromise. A general election is also a risk and could complicate the outlook even further. GBP is likely to remain at current levels in the short term, until we get more clarity, but we remain optimistic in the longer term,” BofAML adds.