Markets walk in on Monday morning still trying to make up how to trade the recent Brexit developments. Should sterling be sold off due to the increase in political uncertainty, or should Theresa May’s push for a softer Brexit instigate a massive sterling rally? Once market participants have processed the initial shock, there may actually be some room for the second scenario to play out. Comment Bart Hordijk, currency analist Monex Europe.
First we should remember that a lot of the recent range boundedness of sterling against EUR and USD was mostly caused by the fact that no news equalled bad news for Brexit, as the UK is running out of time to reach an agreement before the Brexit deadline in March 2019. Theresa May might be playing a bit of a gamble here, but doing nothing would make her a bit of a sitting duck, bleeding slowly as time towards the March 2019 Brexit deadline drips away. By taking a more explicit direction she avoids this faith, which is possibly the best bet she has at the moment. Eventually most Members of the House of Lords are supportive to a softer Brexit, just as most businesses, which implies that May may have lost her Brexit Secretary her, but possibly gained quite some friends elsewhere. On a balance this can strengthen her political position, while she also moves in the direction of a softer Brexit.
Much of sterling’s direction this week will depend on the final contents of the Brexit White Paper, which will be published later this week, and how they will be received by markets. Nevertheless, take this together with the recent upbeat tone of the Bank of England that sent the implied probabilities of a rate increase in August to 80%, and sterling may carry the potential to be the best performing major currency this week.
Chart 2: GBPEUR over the weekend
Chart 2: GBPEUR over the weekend
Chart 3: Future Market Implied Probability of an August rate hike climbs above 80%, after being around 30% at the end of May.
