Risk of a no deal crash-out is too big to be ignored.
Intense domestic UK political battles over Brexit are getting underway but the appearance of high stakes is an illusion. The outcome of the formal Brexit process is already in the bag: on leaving the EU in March 2019, the UK will move into a ‘standstill transition’ lasting (initially) for 21 months. The risk of a no-deal ‘crash out’ is negligible, as is the prospect of the Brexit project collapsing altogether. The questions now being fought over are outside the scope of Withdrawal Treaty which is the legal basis of the formal March 2019 exit.
The sound and fury that is getting going may well create the impression of a beleaguered government and the possibility of Conservative leadership challenges. Any such political tremors could cause passing sterling weakness (and even hesitations in the MPC about rate hikes). As far as any related sterling weakness goes, this would – on our fundamental view of the matter – be “buying opportunity” territory.
Since publication there have been many political scares about a crash-out Brexit, potential challenges to Teresa May's leadership, internal conflict among Conservative MPs, and seemingly chaotic Brexit negotiations. There have been five large falls in sterling vs. euro and in each case they were quickly undone. A 'buy the weakness' strategy proved to be profitable.