Societe Generale discusses EUR/GBP outlook and flags a scope for a break lower on further GBP short covering over the coming weeks.
"The big story is the apparent thaw in EU/UK Brexit negotiations. The suggestion that some issues, such as customs arrangements, need not be decided until after Brexit day next March, hints at a typical EU ‘kicking the can down the road' solution. That makes a ‘no deal' Brexit less likely, unless it comes about as a result of a UK Conservative Party leadership change," SocGen notes.
"That such a modest thawing in the diplomatic temperature is greeted as ‘good news' speaks to the negative mood about the UK economy, political outlook, and currency. Likewise, a 0.6% 3m/3m increase in GDP added to the better mood, or at least to the pressure for GBP short-covering. CFTC data suggest the market had got itself very short of GBP again by the end of August and if those positions are unwound, there's potential for the pound to benefit, all the more so as relative real yields have moved in favour of lower EUR/GBP rate," SocGen adds.