GBP: More scope for risk premium to rise – ING

Petr Krpata, chief EMEA FX and IR strategist at ING, suggests that despite the rebound in the UK pound in the last few weeks, the short term sterling risk premium isn't extreme.

Key Quotes

“We estimate it to be worth around 2.5 % in EUR/GBP (vs 5% this August), with EUR/GBP still within its 1.5 standard deviation band as can be seen in figure 1. This means that more risk premium can be built into sterling.”

“The built-up of speculative GBP/USD shorts paused in recent weeks. Although elevated, they are still below the 2017 extremes (33% of open interest currently vs 43% back then). In the case of the rising probability of a no-deal Brexit and/or early elections, the shorts can rise further.”

“The recent decline of the pound over the last few days has turned sterling into the G10 FX underperformer yet again but we don’t expect the Bank of England to provide any help to the struggling pound, with dovish market pricing to firmly remain in place. Currently, more than one full 25bp rate cut is priced in within six months.”

“We view early elections as negative for GBP and continue to see downside risks to sterling. This is consistent with our forecast of EUR/GBP 0.95 within 1-3 months and GBP/USD falling to 1.17.”