As expected, there was no withdrawal agreement at yesterday's Brexit working dinner (negotiations broke down on Sunday). The EU leaders also said that the possible extraordinary EU summit in November is cancelled due to the lack of progress but sources say that it might come back into play if negotiations progress over the coming weeks. The tone was positive though and it did not end like the Salzburg meeting.
At the moment, it seems likely we will have to wait for the EU summit in December before a deal can be signed (and we cannot rule out that we have to wait until January). We are simply too far away from Brexit day for the politicians to make the necessary compromises.
Our base case remains a 'decent Brexit' (75% probability), where the UK leaves the EU on orderly terms. The real test for PM Theresa May is still when the withdrawal deal is put forward for a vote in the House of Commons, as there are enough hardliners to vote it down, unless PM Theresa May persuades Labour MPs to vote in favour. We expect that to be the case.
We assign 15% probability of a 'no deal Brexit' , as PM Theresa May is still under pressure from Brexit hardliners and the supporting party from Northern Ireland, the DUP. The likelihood of a general election or a call for a second referendum before 29 March is low. A soft Brexit keeping the UK in the single market also seems unlikely.
Brexit remains the key driver for GBP and uncertainty related to the outcome is likely to keep the GBP volatile and undervalued in the coming months. We still expect EUR/GBP to trade lower eventually, driven by Brexit clarifications and fundamental valuations. We target EUR/GBP at 0.84 in 3M (NYSE:MMM) and 0.83 in 6M and 12M , see FX Forecast Update , 15 October.
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