Five reasons to stay short the pound - DB

Analysts at Deutsche Bank believe that any rallies in cable is unsustainable, especially in light of neutral BOE seen a day before. They further note 5 key reasons which will keep the pound vulnerable this year.

Key Quotes:

“First, Article 50 negotiations should start badly. The likely date for talks to begin is the 9th March. A key stabilizer for the pound would be early clarity on a transitional arrangement between the UK and EU. This seems unlikely.

Second, there are no fallback options for hard Brexit. Negotiating multiple free trade deals in parallel with EU talks over a two year time frame is neither realistic nor good policy. We are particularly pessimistic about the prospects of a US trade deal,

Third, we are already priced for a hawkish Bank of England. The Old Lady may strike a more hawkish tone at today’s Inflation Report. But the market is already pricing a 50% chance of a hike by year-end. This seems optimistic.

Fourth, the income balance won’t help the current account. Exports have barely responded to a weaker pound and the trade deficit has deteriorated. By contrast, pound weakness will help improve the income balance, but only on the margin.

Fifth, valuations are not at extremes. Another argument against pound weakness is that all that the bad news has already been priced.”