• The pound is churning in familiar territory against the euro, USD and other major currencies. Our attention is focused firmly on Brexit headlines. We expect the pound to react to German Chancellor Angela Merkel's comments following today’s meeting with Prime Minister Boris Johnson and tomorrow’s meeting with French President Emmanuel Macron which may provide a guide to whether there is potential for avoiding a no-deal Brexit ahead of the G7 meeting this weekend.

• Hence the pound remains highly sensitive to the political news flow and will remain headline-driven for the foreseeable future. Any positive headlines could see the pound garner further support. However, any gains would be limited in nature. We feel that both Merkel and Macron will be guarded in their comments, seeking to neither open nor shut doors on the UK until the domestic political landscape becomes clearer.

• At the moment, it appears that Johnson’s trip to Berlin comes as the UK and EU continue a steady march towards a no-deal Brexit. The government could be taking concrete steps towards a withdrawal from the EU at the end of October unless there is a last-minute compromise or a change in the UK government. Any subsequent general election could ultimately put the UK on the road to another EU referendum were a pro-EU grouping involving Labour, Liberal Democrats and SNP command a majority in parliament.

• Therefore, we expect the big political fireworks and more sustained moves in the pound to come in September when MPs return to Westminster. We would also expect currency markets to maintain a wait-and-see approach to the sterling in the near term. As a result, we believe that risks for the pound are skewed to the downside even as the market has moved along in recent months to price in a no-deal Brexit.

Source: AmInvest Research - 23 Aug 2019