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In the 2017 FX outlook, we articulate a modestly negative set of GBP forecasts but stressed that our conviction level in these was low and that GBP could rise or fall by 5-10% depending on the strategic objectives the government eventually set for Brexit. In other words, the forecast was a probability-weighted average of two extreme binary outcomes - a hard Brexit that prioritizes migration and sacrifices single market access, or a soft Brexit which maintains trade ties at the expense of migration control.
This is an estimate of the loss of GDP relative to where the economy would have been without Brexit and adds up to more than £100bn in today's money.
The estimates suggest that lower migration, trade, and investment between the UK and Europe due to Britain leaving the EU single market could reduce the UK's potential growth rate from 1.8 pct per year from its pre-referendum rate of 2.2 pct. That implies a GDP loss due to Brexit by 2030 of roughly 5.5 pct.
UK’s 4th quarter GDP is scheduled to be released today which is forecasted to be faded away to 0.5% from the previous period, The British economy had advanced to 0.6 pct on quarter in the three months to September of 2016, the same as in the previous period and better than the second estimate of 0.5 pct expansion.
After Brexit jitters, cable reconnected with short-term rates, which are unlikely to trend in H1’17. The Brexit process doesn’t seem to be smooth but is unlikely to deliver large surprises over the next six months. Settling dust and the cable’s future range make GBP volatility a Sell.
Cable has neither seemed up nor down, it is forecasted in the next months to stay in its new range above 1.20, but not rise as high as 1.30. The UK outlook is definitely too gloomy to turn bullish Sterling and believe in a firm continuation of the ongoing short covering.
On the other hand, a lot of bad news is already priced in and digested by the market, preventing it from being overly bearish. Brexit caused two Sterling debacles, first in June with the vote and then after the summer when PM May suggested a hard exit. Cable lost almost about 15% over a quarter and it now seems the dust has settled. In the process, volatility fell but remained relatively high on a historical basis. Assuming a medium-term range in cable and that negative surprises are no longer market tail risks, the GBPUSD volatility is a Sell.
