Pound Sterling Needs More U-Turns from May if it is to Recover vs Dollar and Euro
Image (C) European Council
- FX spot quotes:
- Pound to Euro exchange rate today: 1.0837
- Pound to Dollar exchange rate today: 1.2783
Theresa May gained something of a reputation for performing policy u-turns in the 2017 General Election; an unfortunate reputation that lost her a majority in the House of Parliament.
However, sometimes u-turns are a good thing; and in the case of rescuing Sterling it could be that the more policy shifts May delivers, the better the outlook for the under-pressure currency.
The Pound is back in the mainstream news once more as its apparently relentless decline against the Euro accelerates with fresh multi-month lows being registered on August 23.
To be sure, there is no single driver influencing the decline but you can bet that the vacuum it is falling through has been created by Brexit uncertainty.
Yes, the UK is trying to put forward a more credible negotiating position, but we are learning that these are unlikely to be negotiations, rather it is the EU's way, 'or the highway'.
The EU is unlikely to budge and the market knows this.
What the market is factoring is a hard-Brexit where the UK leaves the EU with no deal in 2019 owing to both sides unwilling to make concessions. This would ensure the trading relationship between the two sides will be governed by WTO rules.
The EU is the dominant partner that will be focussed on securing the integrity of the European project and it therefore goes that it is the UK that will have to relent.
“The bottom line remains that as long as the UK government remains unconvincing in terms of being a credible negotiating partner against the backdrop of a BoE position that is interpreted as accepting of slow-but-steady GBP weakness, FX markets will retain a strong bias towards holding short GBP positions,” says Shahab Jalinoos at Credit Suisse.
The main risk to Credit Suisse’s GBP-negative stance is a sudden "sobering up" by the UK Government “that leads to what is interpreted as a more realistic negotiation stance, something that seems farther off by the day even as the negotiation clock ticks on.”
We would suggest we have seen an example of such “sobering up” with the UK’s position on the European Court of Justice being made known; a position paper issued on August 23 suggests it is no longer the redline to negotiations that it once was.
The move by the UK Government has been described as a u-turn - of course this is a politically-charged description as sympathisers will call it compromise.
The UK Government conceded on Wednesday, August 23 that European Union law will influence the U.K. long after Brexit, a climbdown aimed at accelerating divorce talks that seemed to be initially accepted by eurosceptics in her Conservative Party.
Seven months after May declared the U.K. would "take back control of our laws and bring an end to the jurisdiction” of the European Court of Justice, the UK government says in a position paper on Wednesday that it’s now seeking to bypass just the body’s "direct jurisdiction."
The move has been seen by some as a necessary softening of a previous red line in order to push talks forward.
Yet Sterling is not impressed, it would appear that more u-turns will be required until the UK turns towards a soft-style Brexit.
“The return of UK politicians from summer break has heightened the markets attention to the on-going Brexit negotiations. It hasn’t taken long for Teresa May to do a U-turn, this me on the ECJ. As we return from quiet Summer markets the lack of progress in Brexit negotiations should keep GBP under pressure so we stick with a core short vs EUR and USD,” says Michael Bilbe with Deutsche Bank.
Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.
