"Avoid the Pound" say Credit Agricole, Conservative Party Conference to Keep Sterling Under Pressure vs. Dollar and Euro

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- Sell bounces in the Pound

- Conservative party likely to throw up negative headlines

- Rumours of a new Brexit compromise greeted with scepticism

The Conservative party conference remains the key risk event for Pound Sterling to navigate near-term and we are told by one global investment bank that the currency should be avoided as a result.

Strategists at Crédit Agricole have told clients in a note, dated October 02, that traders should, "stay conservative, avoid GBP," in an apparent nod to the ongoing Conservative party conference and any bounces in the currency should be viewed as selling opportunities.  

"May's supporters are trying to burnish her leadership credentials by bashing the E.U. and signalling no real willingness to compromise on Brexit. Such a belligerent approach is running the risk of resulting in a "no deal" Brexit at the end of the year," says Valentin Marinov, Head of G10 FX Strategy with Crédit Agricole in London.

The past 24 hours have seen the Pound outperform its peers amidst news of a potential Brexit breakthrough with the U.K. looking to offer the E.U. yet another compromise.

Newswire reported that the U.K. would back down on its opposition to new checks on goods moving between the British mainland and Northern Ireland.

In exchange, May’s team would need the E.U. to compromise and allow the whole of the U.K. including Northern Ireland to stay in the bloc’s customs regime.

The Pound rallied against the Euro and U.S. Dollar on the back of the reports and at one point was the best performing currency of the day. The Pound-to-Euro exchange rate peaked at 1.12813 before retracing back to current levels of 1.1269. According to the latest consensus forecasts contained in a special report created by Horizon Currency, the exchange rate is still above where it is expected to be in three and six months from now.

The Pound-to-Dollar exchange rate peaked at 1.3090 before fading back to current levels below 1.30. (Be aware of the strong outperformance of the Dollar right now). According to consensus forecasts, the GBP/USD is now more-or-less in line with forecasts for three and six month timeframes, any further weakness could risk the currency pair becoming undervalued.

It is important to stress details concerning this new rumoured compromise are thin, therefore it is too early to pass judgement on the plan. But the idea that the U.K. remains in the E.U.'s customs regime is striking, and hardly the kind of idea May will be able to sell to her Conservative party peers who want a clean break from Europe.

"Such anonymous source comments may be inconsistent with the apparent efforts by PM May and her cabinet ministers to appeal to a broader range of Tory party members including those who are supporting a harder version of Brexit. We therefore see any bounces in GBP on the back of such stories as selling opportunities," says Marinov.

The call to sell Sterling strength echoes a strategy deployed by Danske Bank who have told clients they are betting against the Pound over coming weeks on increased political risks. 

Indeed, the rumoured proposals looks like a complete capitulation as it delivers the European's what they want: The U.K. now becomes a captive participant in the European customs regime and is unable to strike its own independent free trade deals. How the Prime Minister will unite her party around this plan is hard to see.

We will be watching the contents of Boris Johnson's speech at a side-event to the Conservative Party Conference at 13:00 B.S.T. for any immediate reaction to the ideas.

However, we believe markets will ultimately hold fire on Sterling until Prime Minister May's speech mid-week.

"Investors should remain cautious on the near term outlook for GBP. Indeed, we think that the FX market participants would demand more concrete evidence that the UK and the EU are moving closer to a deal before unwinding some of their shorts in GBP," says Marinov.

Crédit Agricole continue to hope that such a deal may come before year-end, but note rhetoric coming out of the Conservative party conference is not going to boost market expectations of a deal, "this much should also keep 'no deal' Brexit" hedges attractive," adds Marinov.

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