GBP: What can’t go down goes up - ANZ

Research Team at ANZ notes that the sterling responded positively to the PM May’s speech on Brexit, which amounted to an iron fist in a velvet glove.

Key Quotes

“The tone of the speech was conciliatory, urged cooperation, and was optimistic. The EU reaction to the speech was welcoming in that it helped to clarify the UK’s position and confirm that it will be leaving the EU. However, negotiations will not begin until Article 50 has been triggered.”

“The PM’s objectives are a tariff-free trade agreement with the EU, some form of customs union, and a phasing in of new arrangements.”

“Europe remains resolute that access to the single market in goods, services, and capital requires the free movement of people. There will be many twists and turns in the forthcoming negotiations.”

“However, the price action in sterling suggested the market is struggling to get new mileage out of the hard Brexit story, at least for now. In other words, the current risk premium for holding UK assets may be sufficient and this week is the first real suggestion since the Brexit vote that that might be the case.”

“It would appear that markets will need something fresh to trade off of if sterling is to go lower in the near term, and it is possible that the forthcoming negotiations (once Article 50 is triggered) could provide that.”

“Sterling rose sharply after the speech, suggesting that a ‘hard’ Brexit is priced in for now. Potential future downside may require difficult negotiations with the EU.”

“Any expectations of a tightening in monetary policy could come sooner rather than later and could provide sterling with some support − especially if trade negotiations go well.”

“However, it is also possible that real wage growth could fall into negative territory later this year, which would provide a significant headwind for growth. Average earnings are currently running at 2.6% y/y. For sterling, therefore, two-way risks have returned for the moment and the market will be keenly monitoring the politics of Brexit and the performance of the economy in the coming months.”