02 February 2018
- Currency is an early indicator of strength and tends make strong moves followed by periods of consolidation.
- Brexit is the driver now, talk of soft Brexit strengthens the pound
- Interest rate policy is still not clear after Brexit driven short term moves
- Stock markets dominated by mining, a global economic pick-up would boost the markets
UK economic figures now lagging the Eurozone rather than leading, for now. The post Brexit devaluation is priced-in and GBP strength is back in the charts. Inflation based on a weak pound should tail off this year and wage growth may overtake it. GDP growth remains weak but this can only improve as Brexit uncertainties wane. The Eurozone strength and global improvements in outlook will benefit The UK.
The driver now 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. The run up to April will decide whether companies start investing or effectively give up on Brexit.
The ever-optimistic markets are already buying into the more investment scenario as reflected in currency charts. Firmly on course for 1.5000, this would be a clear signal that Brexit Panic is over. Or it could be a signal that markets are pricing in a Soft Brexit – which has no political support.
Politicians need to start talking about the big ideas of Phase 2; tariffs, regulatory equivalence, the customs border with Ireland and the big one; Financial Services Pass-porting. The weakness in The UK right now is coming from the government, despite unexpected progress in Phase 1 talks. The press will not give up on the possibility of a Conservative leadership battle and/or new elections. They have understood the lack of public appetite for anything involving a vote and are playing on that from every angle.
Expect much more market volatility in the imminent Phase 2 of negotiation. The actual outcome of the talks is irrelevant, barring some catastrophic walk-out, unexpected British success, leadership crisis or serious rift in the member states of The UK. Three of those four scenarios put us back in Brexit Panic mode.