Outside of the UK, the world is taking a much need break from discussing Brexit. GBPUSD has settled smack in the middle between 1.2800
and 1.3000. British PM Boris Johnson has formally announced 12th December elections. The current poll indicates that Conservative has a
solid lead over Labor by 12 points. The market is now comfortable with Conservative win and Boris Johnson’s soft-Brexit deal, suggesting
that a smooth transition should be constructive for GBP. Yet, while polls point to a clear winner, the fragmented political landscape and
public exhaustion with politics heightens uncertainty risk. Should the Conservatives healthy led erode, the market will become
concerned over an unappetizing hung parliament. The prospect of political gridlock will be GBP negative. According to IMM data, GBP shorts
have been reduced significantly since October, as markets have become supremely confidence of Johnson’s surprise Brexit deal. This means
that should polling confidence decline there is plenty of room for new shorts to weight on GBP.

This Thursday, the Bank of England monetary policy meeting is expected to be lackluster ahead of critical elections and general
political chaos. The central bank will update its quarterly economic forecasts (Inflation Report), but with event risks high, accurate
forecasting has a gloomy outlook. Markets are pricing in only a few basis points cut into the new year making a rate cut unlikely. Overall UK
data has improved marginally with PMI flattening as growth has stabilized and inflation pressure has become less dynamic. Market
sensitive to domestic monetary policy has dropped significantly with the key driver being Brexit. However, a dovish BoE Thursday and
Conservatives win should cement insurance cuts. GBP asset has lost sensitivity to yield spread since the EU-UK referendum yet we still
believe BoE cut will weaken GBP. We view GBPUSD as expensive given the short-term market risks.

By Peter Rosenstreich



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