British Pound Could "Spiral" Lower vs. the Euro Warns Commerzbank's Leuchtmann, says UK "Out of its Depth" on Brexit

"There is one thing an FX analyst does not have to explain, and that is when Sterling is weakening. However, whenever the British currency does not ease, then that is something that does require an explanation.”

A hard-hitting assessment on the Pound's future relating to the state of Brexit negotiations has been issued by one of Germany's leading currency analysts.

Ulrich Leuchtmann, Head of FX Research at Germany’s second largest bank, Commerzbank AG, tells clients he believes the UK government is out of its depth on Brexit leaving the Pound vulnerable to a self-reinforcing depreciation spiral.

“There is one thing an FX analyst does not have to explain, and that is when Sterling is weakening,” says Leuchtmann in a briefing dated October 10. “However, whenever the British currency does not ease, then that is something that does require an explanation.”

The assessment sums up expectations regarding Pound Sterling since it was wounded by the outcome of the June 2016 EU referendum and confirms the same negative sentiment remains in place in October 2017.

Like many an observer on both sides of the English Channel, Leuchtmann laments the vagaries of Prime Minister Theresa May’s statements on the government’s positions around, and plans for, Brexit.

“We have heard the phrase about the “unique and ambitious economic partnership” many times - too many times! It is high time the Prime Minister addressed the concrete details,” Leuchtmann writes in a recent note. “The FX market (and the British electorate) would like to know now what this phrase entails.”

The analyst made the comments in response to May's latest intervention on the matter of Brexit which saw the Prime Minister deliver a statement to parliament where she maintained an upbeat tone on the progress already made in Brexit negotiations while also warning the UK was preparing for the prospect of no deal being reached with Europe.

Leuchtmann notes the address offered little by way of further details on the UK government negotiating position, or any further concessions to EU negotiators.

“Of course a Prime Minister might not have to comment on every detail. The relocation of the Galileo ground control station may be an issue for her Ministers to decide,” Leuchtmann writes. “But questions like the free movement of goods and people on the Irish border should be issues managed right at the top.”

His comments come at a time when Brexit negotiations are once again at risk of deadlock, with Michel Barnier’s Brussels team insisting the UK has not offered a sufficient “divorce settlement”, while London’s men beg to differ and push for talks to move on to the subject of future trade.

“The fact that she rants, instead confirms the prejudices of many observers: the British government seems to be out of its depth when it comes to the Brexit issue,” says Leuchtmann.

The Commerzbank team have warned that a breakdown in the negotiations would be negative for Sterling and suggest that, far from being a “matter of life and death” for the European Commission, Brussels officials might find support on the continent for not having conceded anything to the UK.

“So why aren’t we seeing gradual GBP weakness every time we hear negative news from Britain?,” Leuchtmann asks. “Because it is not the direct economic effects of the Brexit that are of concern, they are already priced into the current GBP levels.”

Leuchtmann rounded off his brief with a warning that, just because Sterling has avoided a “depreciation spiral”, markets would be complacent to think that such a thing cannot still happen.

The Pound-to-Euro exchange rate was quoted 0.21% lower at 1.1157 during early trading Wednesday, down from 1.1225 on Tuesday. The Pound-to-Dollar rate was down 0.14% at 1.3191 during early trading. 

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