Europe News

Sterling gets a pounding on ‘marked’ impact of prime minister’s Brexit stance

Justin Tallis | AFP | Getty Images

The British pound has started the year on a rough note after it slumped to a 10-week low against the dollar on Monday after the British Prime Minister suggested the U.K. may be on track to leave the European single market.

Prime Minister Theresa May's comments over the weekend sent the pound below $1.22 on Monday and continues to remain under pressure as it trades around $1.21.

"From here we expect more of the same for the pound and push cable below 1.20 and EUR/GBP above 0.88", Jordan Rochester, global fx strategist at Nomura, said in his morning note.

He further added that "in the short term EUR/GBP could have more juice in the short GBP trade and overshoot further than GBP/USD. Given the USD bulls are currently on strike until the risk event of Trump's press conference on tomorrow (Wednesday) is out of the way."

A stack of British one pound sterling coins stand in front of a British Union flag in this arranged photograph in the United Kingdom, on June 13, 2016.
Jason Alden | Bloomberg via Getty Images

In an interview with Sky News over the weekend, Prime Minister May confirmed Britain's plans of leaving the European Union. Financial markets also interpreted her comments as leaving the single market within the EU, following which the pound slumped for the first time since its flash crash on October 7.

May later said her comments on "hard Brexit" were misinterpreted and it was wrong to say a "hard Brexit" was inevitable.

"I don't accept the terms hard and soft Brexit. What we're doing is going to get an ambitious, good and best possible deal for the United Kingdom in terms of … trading with and operating within the single European market," she said.

UK markets, especially the pound, has been quite sensitive to the slightest hint from Prime Minister Theresa May especially as speculations and uncertainty on when and how Brexit will happen continues to loom.

"Political speeches come and go throughout the year with most having a very limited effect on markets. But when it comes to Brexit and a speech from Theresa May, the impact can be marked," Nomura's Rochester said.

"Her October Tory conference speech as Prime Minister was 58 minutes long, but has had a long-lasting effect on UK markets. GBP/USD is currently 5 percent lower, after falling 10 percent at the low of the "Flash Crash" and 10yr Gilts are 65bp cheaper."

The currency has seen a lot of volatility since the U.K. voted to leave the European Union. While the initial moves were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency fell a further 6 percent on October 7 on fears of a hard Brexit. The pound continues to remain under pressure at current levels of $1.21, down nearly 19 percent since June 23.

Meanwhile, HSBC have created a "Brexometer" to understand what markets are expecting from Brexit. According to this Brexometer, a number between 0 and 100 will mean how hard a Brexit the market is expecting.

"If Brexit were never to happen, this would mean 0 on the Brexometer. We believe this is in line with GBP/USD trading around $1.55. However, the hardest Brexit would be 100 on the Brexometer. We believe this is in line with GBP-USD trading at $1.10 in the near term," according to a research note from HSBC.

At the moment, with the pound trading in the $1.20 to $1.25 range, the currency market is pointing to a relatively hard Brexit, according to the Brexometer.

"Our calculation shows we are pushing further towards a hard Brexit. In the coming months, the pound will continue to act as the bellwether of Brexit sentiment, and will see the Brexometer swing between harder and softer outcomes. Ultimately, we believe the balance of risks points to a weaker pound and a harder Brexit," HSBC said.

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