(27 JULY 2018)DAILY MARKET BRIEF 2:Brexit negotiations with Barnier are difficult

Brexit negotiations continue with Theresa May taking control of discussions. As communicated on Tuesday in a ministerial statement, PM May has taken full responsibility for the negotiations with the EU, accompanied by Dominic Raab, her new Brexit Secretary, who replaces David Davis. Following the late-afternoon announcement, the cable surged from 1.3116 to 1.3189 the day after (+0.67%), a trend that did not last as talks with the EU continue to pose challenges for May's Brexit team, thus creating further uncertainties with regard to the 3-month deadline related to the customs relationship with the Single Market.

Indeed, the euphoria seems to have disappeared as the pair lost intraday gains from the beginning of the week amid tough European rhetoric and a slowdown in economic fundamentals. After having agreed a Brexit white paper with her cabinet at Chequers two weeks ago, EU Commission negotiator Michel Barnier declared being unsatisfied with May's solution for the Customs Union, one of the nerve centres of the plan, thus putting further pressure on the PM. The discussions, however, ended on a positive note with Barnier expressing support for a continued security relationship with the UK. The next meeting is expected to take place in mid-August.

The Bank of England Monetary Policy Committee will most certainly confirm market expectations and raise interest rates by 25 bps next Thursday, regardless of the recent Brexit debates. Despite a slackening in economic expansion (disappointing private consumption and wage growth), inflation remains above the 2% target. In any case, a no-go situation would threaten the GBP, which would see a drastic drop.

GBP/USD fall continues, currently trading at 1.31 and expected to decline further, as recent Brexit events can only further weaken the pair. Approaching the 1.3080 range.

By Vincent Mivelaz