Brexit Noise and The Pound Slump

Asian markets were certainly not impressed this morning with the noise from the UK over the weekend.

The British Prime Minister was interviewed over the weekend by Sky News and the comments were suggestive of a likely shift away from a soft-Brexit, which has, together with solid economic data out of the UK, continued to support the pound through to the end of last year, though it wasn’t so rosy in the first week, the pound falling 0.83% against the Dollar, easing back from a high of $1.2419 last Thursday.

The British Prime Minister was looking to clear up any market confusion over the government’s intentions come 31^st March, by which time Article 50 is expected to be invoked with Britain entering into a new era from an economic and geo-political standpoint.

If there were any doubts over whether Britain was leaving, there shouldn’t be, though whether the government will be able to walk away from access to the single market remains to be seen, uncertainty over how involved Parliament will be, the real confusion for now, as we await the ruling from the Supreme Court. May’s desire to protect Britain’s borders at the expense of access to the single market will ultimately be considered a hard-Brexit from a market perspective and that will be the immediate negative for the pound, though the Prime Minister fell short of referring to freedom of movement over the weekend.

The reality is that the EU is not going to budge on the issue of freedom of movement and, with Britain unwilling to surrender the desire to protect its borders, well, the writing is on the wall and it will then just boils down to the government being able to negotiate favourable trade terms and that really will be an unknown, negotiations not starting until at least the beginning of the 2^nd quarter, once Article 50 is invoked.

It’s not all doom and gloom however, with EU member states reliant on trade with the UK, any strong arming unlikely to be too favourable for the EU at a time when Trump will also be looking to strong arm the EU and despite the rhetoric, we expect smaller member states to have less impact.

This morning’s losses in cable came with the Dollar Spot Index on the rise, up 0.03% to 102.19 at the time of the report, recovering from early losses, as sentiment towards the U.S economy continues to improve ahead of Friday’s retail sales figures, which are set to boost the Dollar and possibly optimism even amongst the more dovish FOMC members.

Cable had slipped a whopping 0.99% to $1.21649 ahead of the European open, the losses reflective of sentiment in Asia, with the pound managing to make a partial recovery going into the European session, sitting at $1.21785 at the time of the report, the pair at sub-$1.22 levels for the first time since late October.

With economic data out of the UK this morning was limited to December’s Halifax House Price Index figures, which failed support for the pound despite the surge in prices, with a lack of material data out of the U.S to throw the Dollar off course, we expect the pound to be on the back foot ahead of the overnight BRC Retail Sales Monitor numbers for December, the markets now eager to gauge whether consumer consumption rates are sustainable as inflation begins to pick up and lines of credit dry up. Weak data is a certain negative for the pound as the markets begin to consider the BoE’s prediction of a weakening in consumer spending in the New Year, which could align the markets with the BoE’s outlook, though we are likely to needs to see more than the BRC Sales Monitor numbers for the markets to be completely convinced.

Outside of the macroeconomic data today, look out for comments from FOMC members Rosengren, Lockhart and Evans, any hawkish commentary adding further upside for the Dollar, though we can discount any Evans commentary, following his commentary last week, favouring the projected 3 hikes for the year.

How far the pound falls this week will ultimately boil down to how the markets respond to data out of the UK on Wednesday, with November industrial and manufacturing production and trade figures scheduled for release, though we could see Carney cause some carnage should he talk of the need for further monetary policy easing ahead of the government’s March deadline, when he speaks on Wednesday, such comments a curveball when considering the data out of the UK in recent weeks, particularly with concerns over rising household debt.