Pound Sterling Suffers as Diamond-Hard-Brexit now Predicted but Beware a Relief Rally

• Pound to euro exchange rate today: 1.1392, day's lowest: 1.1276
• Pound to dollar exchange rate today: 1.2081, day's lowest: 1.1976
• Pound to Australian Dollar rate today: 1.6159, day's lowest: 1.5985
• Pound to New Zealand Dollar rate today: 1.7000, day's lowest: 1.6824
• Pound to Rand rate today: 16.4700, day's lowest: 16.1886

Pound Sterling was smacked down to a new multi-year lows against the Dollar and fell sharply against other major currencies following weekend report from the Sunday Times that Theresa May will make the right to control UK immigration a red line in upcoming Brexit negotiations.

The call is expected to be made in a major speech on Brexit due on Tuesday.

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.

“As long as control over immigration remains the UK government’s anchoring point, it is virtually impossible to envision anything other than an exit from the EU’s single market,” says Dr. Vasileios Gkionakis, Global Head, FX Strategy at UniCredit Bank in London.

It would appear the UK are starting to fight back in a debate that has almost exclusively centred on the terms dictated by the EU side of the table.

Either way, Markets are now have more certainty on the outlook concerning Brexit and it looks like 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.

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."

However, Senior Currency Strategist Elsa Lignos at RBC Capital Markets believes that while there is a bearish consensus brewing around May's Tuesday speech, those looking to punish Sterling further could be disappointed:

"So far May has deflected the question of hard or soft Brexit (“I don’t accept the terms hard and soft Brexit”….”[we’re] going to get an ambitious, good and best possible deal for the [UK] in terms of… trading with and operating within the single European market”).

"If she will not state it clearly when questioned, she may not state it any clearer in her speech – which could disappoint those looking for a further GBP sell-off. GBP may take its cue from earnings this week. It has tracked the outperformance of financials since the US election and this week could see that pattern continue. Dec inflation/retail sales and Nov labour data are also due."

Hammond: We Will Do Whatever We Have To Do

The UK's treasurer is starting to talk tough.

In an interview with German Welt am Sonntag newspaper, Chancellor of the Exchequer Philip Hammond warned Europe that being excluded from the EU's single market would force the UK into chancing course to stay competitive.

In short - the UK will slash corporation tax to remain competitive in relation to the EU.

Hammond told Die Welt:

"If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do."

"The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged."

This is certainly the most combatitive we seen Hammond to date.

Combined with talk of red lines, we get the sense the UK is upping their game as until now the discussion has exclusively been about what conditions the European side of the table will be imposing.

The Brexit stance is becoming clear, the Pound is falling, and we believe the market will find its bottom sooner than later now.

In a sense, this is welcome for long-suffering Sterling bulls.

Bookies Bet on Steep Decline

Bookies have meanwhile seen a pick-up in interest amongst punters looking to make something on Sterling's demise.

“The fears of ‘Hard’ Brexit have got the pound wobbling and we offer 8/11 that the year’s low will fall between $1.19-1.1," says Betway’s Alan Alger.

“A number of analysts have expressed deeper concerns for the UK currency, and a slide into the $1.09-1 territory is far from out of the question at 11/10. At 10/1, there’s even a sneaking feeling amongst our traders that the dollar could be stronger than the pound at some point this year,” says Alger.

Current odds at Betway:

$1.19-1.1: 8/11
$1.09-1: 11/10
$ to be stronger than the £ at any point in 2017: 10/1.