Brexit Baiting

07 January 2018

UK Wages & Inflation

UK economic figures stand up surprisingly well given all the gloom in the press. Notably inflation and wage growth. The two things the Americans have been grappling with throughout 2017 remain strong in the UK. Wage growth is not stronger than inflation but inflation is set to fall, with the post Brexit devaluation priced-in, and GBP strength returning to the charts. GDP growth remains weak but this can only improve as Brexit uncertainties wane.

Phase 1 of the talks was signed off in December, analysts are pleasantly surprised to see that we are ready to begin Phase 2 in early 2018. The driver here is that the fiscal year of the UK ends on April 5th and many businesses set theirs to 31 March. A lot of investment has been held up pending clarity on Brexit. This March is the last budgeting round for Business prior to the March 2019 exit. If May & Co get it right they can trigger an avalanche of investment.

This sentiment is reflected in the markets, selling is yesterdays news, buyers now need an excuse to trigger. Politicians need to start talking about the big ideas of the trade deal; tariffs, regulatory equivalence, the customs border and the big one, Financial Services Pass-porting. The primary weakness in The UK right now is the government, they’ve had a quiet Christmas but have yet to show any mettle since the election disaster.

Grandstanding and Posturing in Brexit Talks Phase 2 will be much more exaggerated than in Phase 1. This signals a lot of market volatility in the near term but the end result should be a stronger pound, just on the basis that clarity is better than uncertainty. The actual outcome of the talks is largely irrelevant, barring some catastrophic walk-out or unexpected British success.

Interestingly, now that we can stand back and apply hindsight, the fractures of Brexit and the October Flash look less extreme. You might think the EURGBP chart is more illustrative, but it only confirms the fallacy:

 

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