“In euro-sterling we’ve had a very strong conviction and it’s one of the biggest forecasts I ever remember making on a major currency,” David Bloom, HSBC’s London-based global head of currency strategy said in an interview last week.  That’s “a 20 percent move and that’s quite something. It’s very unusual that we make such, what was at that time, an outrageous forecast” but “we are roughly half way there and we believe in it,” he said.

Bloom first made his parity call a year ago, when the euro was around 83 pence. HSBC predicts the euro and the pound ending this year at $1.20, which are both “strong views,” he said.

Euro-sterling was little changed at 0.9085 as of 9:20 a.m. in London on Tuesday, having reached 0.9119 on Aug. 11, its strongest level since October. The pair reached a record 0.9803 in December 2008.
Diverging Politics

Since France elected pro-European leader Emmanuel Macron in May, risks of the currency bloc fragmenting have diminished. In addition, euro-region economic data are showing signs of improvement. In contrast, Brexit negotiations are far from clear and that’s weighing on the pound. That’s the main concern for Standard Bank’s Barrow.

It all “depends a lot of how the Brexit negotiations go,” he said. “On euro-sterling previously we thought the 90-92 area might be the peak, but obviously now I no longer do.”

While Morgan Stanley’s parity call is partly due to a bullish-euro outlook, the U.K. currency is “likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks,” Hans Redeker, head of foreign-exchange strategy, wrote in a client note dated Aug. 10.

Eoin Treacy's view

Parity in foreign exchange markets represents about the biggest round number there is so little wonder when traders look at the trend of the Pound’s decline against the Euro that they think of the 1:1 ratio as the most logical target. 

UK inflation came in below expectations today at 2.6% rather that 2.7%. Against a background where Mark Carney is talking about the economic cost of Brexit and has been cutting the growth forecast, investors appear to be ignoring the fact inflation is well above the BoE’s target of 2%. The reason they are willing to overlook that caveat is because the BoE has run inflation hot in the past and seems likely to continue to do so considering the issues it has outlined. 

The Pound has dropped 10¢ since April to test the €1.10 area. At the end of 2008 the Pound bottomed at €1.02 so there is some precedent for a move to significantly lower levels but nonetheless, a short-term oversold condition is evident and the price is in an area of previous support. Against that background forecasts of a significant additional decline are more a reflection of shorts already in the market than what people are likely to do with their capital. However, if potential for a bounce and reversionary rally back up towards the mean are to be credible, then it will need to at least break the four-month progression of lower rally highs.  

The release today of a template for a “transitional agreement” by the UK government highlights the fact Philip Hammond’s camp has gained influence over the summer. Here is a section from an article by Sam Coates for The Times:

A government position paper to be published today will say that Britain is looking at introducing a “temporary customs union” during which there will be no need for companies to fill in additional paperwork, ensuring that goods move smoothly across the border with the rest of the EU. A Whitehall source said that although the name of the customs agreement might change in March 2019 the rules for business “will be exactly the same”. The insider added: “This is all about giving business what they asked for.”

The government will insist that during the transition period it can negotiate and sign trade deals with non-EU nations that will be implemented at the end of the interim phase. Yet sources conceded that the ability to sign them will ultimately be settled only during Brexit talks in coming months. “We need to talk to the EU about that,” the source said.
This concession contrasts with an article written by Mr Hammond and Dr Fox at the weekend, which said: “When we’ve left the customs union, we will build on these relationships by negotiating as an independent nation with the freedom to sign bilateral free-trade agreements.”

Ireland’s EU commissioner, Phil Hogan, warned yesterday that plans for a temporary customs agreement with the EU must not be taken for granted. He accused British ministers of suffering a “high level of delusion”, telling the Financial Times that they “still don’t realise . . . the other 27 [member states] have to agree to this transition period of two or three years or whatever they’re going to be seeking”.

So far, at least from my vantage point it seems like the tone of the Brexit negotiations has been a lot of bluster but the reality is more akin to a supplicant going cap in hand for concessions. That says a lot about the imagination of the negotiating team.

This article from Reuters highlights the fact a substantial number of people voted for a hard Brexit and are not happy with the direction of policy. It strikes me as interesting that the negotiations will last two years and the proposed transitional period another three. Assuming Theresa May’s government survives a full term (far from a certainty), it would mean the next general election will likely represent either a clear or proxy rehash of the referendum where the Conservatives may not have the majority. Therefore whether Brexit in fact goes ahead remains a medium-term uncertainty.