RBC Capital: Get Ready for a Bounce in the British Pound this week

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Foreign exchange strategists at RBC Capital Markets reckon the Pound could recapture a good chunk of the ground it lost against the Dollar last week.

In a strategy note to clients, RBC Capital's Adam Cole reckons although developments in Salzburg last week were not positive, "we think they changed the potential course of Brexit by less than implied by the huge move lower in spot and we will use this weakness to take a tactical long position."

A stark reminder of the challenges facing Brexit negotiators was is issued by the European Council's Donald Tusk and other European leaders in Salzburg last week when they effectively killed off Theresa May's so-called Chequers proposal following an informal summit of the European Council.

On her return from the summit U.K. Prime Minister Theresa May told the media that talks had reached an impasse and she called on the E.U. to show a willingness to provide solutions to current sticking-points in order to move talks along.

The developments increased the prospect of a 'no deal' Brexit and prompted the largest fall in Sterling against the Dollar of 2018. 

However, there is a feeling the decline might be something of an over-reaction by markets, and Cole makes buying GBP/USD his 'trade of the week'.

Several other factors suggest to Cole the risk is skewed to a bounce in Pound Sterling this week.

These factors back Sterling include positive M&A news over the weekend - entailing the Comcast bid for Sky - and Labour’s continuing drift toward endorsing a second EU referendum at its annual conference (ongoing this week).

While Labour has not yet endorsed a referendum on being in or out of the E.U., it looks set to endorse a referendum on the final outcome of the E.U.-U.K. negotiations.

We still need to see more details how this would actually work.

Whatever the case, for RBC Capital this appears to be a Sterling-positive development.

"GBP should also be the main beneficiary of hedging-related USD-selling into month-end, given the strong rise in US equities month-to-date," says Cole.

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