How much upside if there's a Brexit deal?
MUFG Research discusses GBP outlook and sees a scope for a rise towards 1.35 if a Brexit deal is reached with the EU in Q4.
"This week is a very very important week for the pound (you've heard that before over recent years) as we slowly grind toward the day of true Brexit - the ending of the transition period in December. Of course for that to go smoothly, a trade deal needs to be in place and hence the importance of this week - the EU Summit is scheduled for 14th/15th October and this has always been the deadline marked out for getting any deal legislated for in time for the start of 2021.
The surge of the pound yesterday was a reflection of the more positive mood-music as the talks kicked off. There will be 3 days of talks in Brussels starting today. We have always assumed that a deal would be finally done but that it would probably extend beyond the mid-October deadline," MUFG notes.
"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 prompts a reversal and with it the BoE cutting rates to zero percent," MUFG adds.