The Brexit news flow should slow down – European Council President Donald Tusk has said that he will present the draft of Brexit guidelines to the EU27 member states within 48 hours. However, they still need to formally agree the guidelines and further time should elapse while the European Commission defines its strategy. Furthermore, ahead of key elections in Europe this year we do not expect much negotiation progress. Our economists expect Brexit negotiations to only start in early June.

Our BNP Paribas Positioning Analysis indicates that GBP remains the largest short position amongst G10 currencies (-35 on a -/+50 scale). Short positions have extended recently and the score is now in line the lows in January 2017, when the market adjusted to the UK government indicating it wouldn’t push for single market access after Brexit. The recent increase in short positioning has been mainly driven by a fall in the Fund Position Tracker (Chart 1), which gives an indication of hedge fund positioning. We think some of the market’s short positions could be squeezed out once Article 50 is triggered and the news flow slows.

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Despite inflation now above the Bank of England’s 2% target (2.3% y/y in February), the market is only pricing in a 40% chance of a BoE hike this year. Our economists believe UK CPI will reach 2.7% in the year end, the BoE expects inflation to remain above target until at least 2020 and some of the board members have already expressed limited tolerance for inflation  overshoot. As the Brexit news flow slows down, markets should refocus on UK economic fundamentals.

BNP Paribas remain positioned for EURGBP downside via a EURGBP ratio put spread recommendation: buy 1x 0.8480, sell 1.5x 0.8000 (26-Jul-17 expiry) after the triggering of Article 50 in 29 March.

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