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British Pound Plunges to Fresh Lows as May Signals Diamond-Hard-Brexit
The Pound was smacked down to a new multi-year lows against the Dollar and other major currencies as Pacific markets opened on Monday 16 January.
The decline was expected.
This weekend we were met with reports from the Sunday Times that Theresa May will make the right to control UK immigration a red line in upcoming Brexit negotiations.
This clashes with the EU's own red line that free movement of labour is a prerequisite for membership to the EU's single market - and the question of single market access granted to the UK following Brexit is what is driving the Pound at present.
According to a report, the UK government's red lines will be an end to free movement from the EU and the right to hold bilateral trade talks with other countries, which it is thought will not be achievable while still in the single market.
Markets now have certainty - the UK is leaving the EU's single market.
While the Prime Minister is intending to attempt to make a positive persuasive case for the UK leaving a spokesman suggesting that "we are expecting a market correction" underlines the presumption within government of the currency trading fresh lows this week.
"When May encouraged GBP negativity back in October she failed to recognise or attempt to mitigate the impact of the slide, expect much the same this time, indeed expect an attempt to make a virtue of the move via benefits to the export sector," says Jeremy Stretch at CIBC Macro Strategy in London.
The job for currency markets now is to find the right price for Sterling to reflect the move.
"Early indications suggest single market access is unlikely to be retained - a headline which could send GBP sharply lower," says Viraj Patel at ING in London.
"Hard-Brexit fears plus weaker UK data points to a test of the 1.20 level. Range next week: 1.1840-1.2320, 1 month target: 1.15," says Patel.
Patel wrote this prior to the admission that the UK would be setting red lines on migration; they may have to recalibrate.
For analyst David Bloom at HSBC we are now in what can be defined as “diamond-hard-Brexit” - one in which the UK would completely sever all links with the continent, including the common market, the EU budget and free movement of labour.,
HSBC say GBP/USD would likely trade at 1.10 on this diamond-hard-Brexit scenario.
The sooner we reach this level then the sooner the recovery can begin.
Note though that downing Street has described the suggestion that the UK is looking to pull out of the single market as "speculation" with a source telling Sky News: "The issue of the single market and the customs union will be answered on Tuesday when the Prime Minister sets out her negotiations."
GBP/USD Outlook: Huge Uncertainty Guarantees Volatility, Bad News Priced In
There will be further important concerns surrounding Brexit, but much of the short-term potential adverse impact is already priced in and the Bank of England will have to shift towards a tighter monetary policy given inflation fears. The high degree of US and UK uncertainty will ensure high volatility, but it will be difficult to sustain GBP/USD moves below the 1.2000 level.
Markets concerns surrounding Brexit risks have increased again ahead of Prime Minister May’s keynote speech on Tuesday.
There are strong suggestions from sources that the Prime Minister will announce that immigration control is a key priority for the government and that these demands will be incompatible with single market access.
In this context, there are strong expectations that the government will look to leave the single market and not participate in a customs union. Instead, the government will focus on negotiating individual, global trade deals.
These fears have triggered renewed expectations of a so-called ‘hard’ Brexit, which has triggered renewed selling pressure on Sterling. GBP/USD retreated to lows below 1.2000 in Asian trading on Monday, the lowest level for three months during the flash crash with EUR/GBP strengthening to highs near 0.8850.
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May's Brexit Showpiece to Allow British Pound to Finally Recover vs Euro and Dollar
Pound Sterling is the best-performing currency in the forexsphere today as Theresa May sets out a clear - and importantly - realistic vision for the UK's position in upcoming Brexit negotiations.
For the foreign exchange markets the start of the show was an unexpected announcement the UK Parliament will have a final vote on the Brexit deal.
Foreign exchange markets like the idea of increased oversight of the deal as they believe it will ultimately be more market-friendly.
"News that the Brexit deal will be put to a parliamentary vote has seen Sterling rocket – as has assurances from May of Britain’s global intentions," says Dennis de Jong at UFX.com.
May was also clear that the UK would be exiting the single market as she realises the UK will be unable to abide by the Brexit mandate while obeying EU red lines on single market membership.
However, this was largely priced into the Pound ahead of the event thanks to weekend press reports on the matter.
Traders have woken up to the fact that they fell hook, line and sinker for May's stragey - get the bad news out of the way through leaks and then hit them with the good stuff at the big-ticket event.
By sparking a rally in the Pound she can argue that markets are unambiguously on her side when it comes to her vision for the future.
And some now see the prospect of a sustained recovery in Sterling being possible.
"May’s speech provided clarity where there was uncertainty, and if there is anything markets hate, it is uncertainty," says Joshua Mahony at IG in London. "With everything now out in the open, there is a good chance we will see the Pound start to recover from here on out."
Pound Sterling Lower Today Despite UK Now Running at Full Employment
Pound Sterling continues to struggle through the mid-week session despite the latest labour market statistics from the ONS confirming the UK is now runing at full employment.
The Pound retraced some impressive gains as the ONS reports both employment is up and wages are up.
The Average Earnings Index (with bonuses included) rose 2.8% in November, ahead of the 2.6% forecast.
The Claimant Count actually fell by 10.1K, markets were forecasting a rise of 5K.
"The UK has once more shown itself to be incredibly resilient during a period of great uncertainty, with an incredibly encouraging jobs report showing a 14-month high in average earnings and claimants falling by the fastest rate in 10-months. Following yesterday’s strong UK CPI showing, it is clear that the UK economy is performing enviably and should this trend continue, it will raise the pressure on the BoE to roll back some of their easy monetary policy," says Joshua Mahony at IG in London.
Not every one was impressed by the data though.
Paul Hollingsworth at Capital Economics says the latest data suggest that while the UK labour market has lost some of its shine, it remains resilient despite Brexit uncertainty.
"Admittedly, employment fell by 9,000 in the three months to November. But this was a much smaller fall than the consensus expectation of a 35,000 drop," says Hollingsworth.
Analyst Phillip Shaw at Investec notes that the UK is now running at full employment.
"We think that the labour market is running at around full capacity, limiting the ability of firms to keep hiring at the same pace without running into skills shortages and/or needing to jack up wages," says Shaw. "A good news story here is that even though jobs growth has flattened off, the economy remains robust (we reckon GDP grew by around ½% in Q4 last year), suggesting that long-elusive productivity growth might be picking up."
This suggests UK inflation will start rising because of wage rises and not just the price impact of a weaker Pound.
Such inflation is typically remedied by rising interest rates at the Bank of England which in turn proves supportive to the Pound.
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