Hard Brexit? Sell Sterling!

Hard Brexit? Sell Sterling!

Davis and Fox; Brexit Hawks

If anyone in the U.K. didn’t believe that Brexit was going to happen, they should have had their eyes very firmly opened on 20th July.

The first joint Press Conference given by the major Protagonists, Michel Barnier and David Davis since negotiations began in earnest brought clarity to the task that lies ahead.

Barnier finds it very difficult to hide his frustration at what he sees as the intransigence of the U.K.’s bargaining position. In a very European/EU/Brussels way, he clearly feels that the U.K. is arguing over points of law such as who protects the rights of the EU citizens remaining in the U.K. post-Brexit.

Davis, on the other hand is displaying a very 21st century British approach like a Blair/Farage caricature. He seems to either not be listening when Barnier speaks or not taking the whole thing particularly seriously. It has now been revealed that such meetings will take place for four days a month. That leaves just seventy-six negotiating days until March 30, 2019.

Liam Fox, the U.K. Trade Minister, a firm no deal better than a bad deal supporter, commented yesterday that upon leaving the EU with no trade deal, the U.K. would survive very well.

Traders clearly disagreed pushing the pound close to 0.9000 versus the common currency.

Mario Draghi; The Markets’ Favourite Central Banker

Clarity, advance guidance and a plan. What more can the market ask for from a Central Bank Press Conference? Very little when judging the reaction of the Euro to yesterday’s ECB meeting.

Mario Draghi is an archetypal Central banker. All grey suit and business-like approach. But, when he speaks the markets listen. He is turning into a “Greenspan for the new Millennium”. He has been at pains to explain the difference between a tightening of monetary policy and an interest rate hike which will be music to the ears of those in Athens and Nicosia. Higher rates are the last thing Greece and Cyprus need right now. Draghi has said a rate hike would create inequality and he means what he says!

Yesterday, Draghi gave advance guidance on what the ECB is considering regarding the withdrawal of extraordinary measures. There will be discussion of a tapering of the Asset Purchase Plan in the Autumn. In traders’ minds, this opens the possibility of a start early in the new year. The market will always try to interpret or second guess a Central Banker, believing like a “Da Vinci code” that there is hidden meaning in his words.

Markets reacting to major drivers

It never pays to try to second guess the FX market. In a very “jawsesque” manner, “just when you thought it was safe to go back into the water”, the market bites back. However, for now the reaction to global events; political, economic and policy-driven, is very much aligned.

For example, over the first seven months of the year we have seen the Eurozone create political stability, an economy where even the weakest parts are starting to perform and a Central Bank that is doing and saying the same thing. In the U.S. political stability is suffering from credibility issues, the economy is faltering badly and the Central Bank is confusing the market. The effect? The dollar index has fallen 6% and the common currency has risen from 1.0340 to 1.1660!

Brexit had been blamed for all that ails the U.K., particularly the fall in Sterling following the referendum. Now as Brexit becomes a reality, Sterling restarts its downhill run.

There are few straight lines in FX trading but fundamentals are lining up nicely although there are always Black Swans!


Alan Hill is Treasury and Trade finance specialist for Middleton Jones and the Principal Consultant at TreasuryConsultancy.com.