UK Prime minister, her cabinet and the Brexit process remain under pressure after the 5th round of talks closed with deadlock last week

Mrs May`s hold on her premiership seems weaker than ever as cabinet colleagues continue to cause problems and most notably, her Chancellor who had to back-track on his comment referring to the EU as “the enemy” while he attended a finance ministers meeting organised by the IMF in Washington last week.  Mr Hammond was already under fire for suggesting that a transition period of 5 years instead of the 2 years Mrs May has been pushing for.  Ex- Conservative chancellor, Nigel Lawson called on Mrs May to sack the current chancellor Hammond, saying “what Hammond is doing is very close to sabotage” Lawson went on to say “He (Hammond) may not mean it, but in practice what he is doing is very close to sabotage”, adding that it was “for her (Mrs May) to decide” where Mr Hammond could be moved to. Lord Lawson is a “leaver” and consistently says the UK has “nothing to fear” over Brexit.  It is quite obvious that Mrs May needs to somehow stamp her authority (what is left of it) on the situation and while both Boris Johnson and Mr Hammond make it obvious they are poles apart on Brexit, if she cannot control them at cabinet level, she will need to move them to be able to move on.  Keep them at cabinet level and they will erode whatever authority she still has.  If Boris Johnson were to be sacked.  That might be Sterling positive. If Mr Hammond were to be sacked, that would likely see a knee jerk negative move for Sterling as markets are focusing on the upcoming budget and no obvious replacement exists within the cabinet. Just my own opinions.

Now that the 5th round of talks is complete and although negotiators are closer to a deal on ex-pats and Northern Ireland, the divorce settlement and total lack of progress in terms of movement from the EU after Mrs May`s Florence speech where she guaranteed that EU taxpayers would not lose out, seems to have drawn a line under proceedings.  No movement whatsoever and the general feeling from the UK-side remains that the ball is in the EU`s court. Negotiations are still in the positioning stage while the deadlock is being passed on to the real EU decision makers, Merkel and Macron principally.  EU states political heads need to intervene and either force the divorce bill issue or allow trade talks to commence while the divorce settlement is negotiated further. Allowing trade talks to commence makes sense from the points of view of both sides because trade arrangements such as access to the single market and the issues surrounding the customs union will surely have a bearing on the total amount that is fair for the UK to pay for including programmes the UK is already involved in and future programmes. Perhaps EU decision makers might allow trade talks to begin on that basis.

EU leaders will meet 19th and 20th October after being briefed by Michel Barnier, EU chief negotiator on the exact progress so far. UK`s chief negotiator, David Davis urged EU leaders ahead of the summit, to give Mr Barnier a mandate to start trade talks and to “build on the spirit of Co-operation we now have”. A sign that positioning is about to take a backseat?  It does make sense to turn to trade talks because as stated before, trade talks and the customs union have great bearing on the divorce bill.  Talks on the future trading relationship now, would help to avoid problems with the divorce bill later on and help talks to get back on track with less roadblocks.  For that to happen, the positioning needs to end now and serious discussions across the board need to proceed as March 2019 gets closer by the day.  Discussions on a transition period beyond March 2019 need to be finalised, as a transition period is in the interests of both sides.  Although Mrs Merkel and Monsieur Macron said jointly that a transition period is not for discussion yet, again, this seems like positioning and so we need to listen carefully for any mention of that between now and during the up-coming summit.  The UK has offered to keep paying into the EU budget during a proposed 2-year transition period.  Even a hint towards a transition period is likely to be quite Sterling positive with markets beginning to write in the prospect.

UK politics has seen some remarkable twists and turns, none more so than Labour Party leader Jeremy Corbyn`s shadow Chancellor, John McDonnel during an interview on the Andrew Marr politics show, said that the Labour party would be able to put together a coalition of opposition toward anything that looks like a hard Brexit.  He said “there are discussions going right across the House”. Labour could easily make that a reality and waits to be seen.  When pressed further by Andrew Marr, Mr McDonnell said he would “not countenance” leaving the EU without negotiating a new trading relationship, after Mrs May had said earlier last week that the Government was setting aside money to prepare for a possible “no deal” scenario and a slap down for her Chancellor who had said earlier that no money had been laid aside as a precaution against no deal. In saying that Labour had been talking to Conservative MP`s in a bid to form a Commons majority against a “no deal” Brexit, he is clearly doing the EU`s job of continued positioning and it could be argued that he is further illustrating the difficulties Mrs May continues to face.

Mrs May was asked by Ian Dale on his LBC radio show how she would vote now if there were another referendum.  She refused to answer so draw your own conclusions. Kier Starmer, Labour Party shadow Brexit minister said on the Robert Peston show when asked how he would vote, “I think it`s blindingly obvious to everybody that we`re not going to complete the whole final deal scenario within the two years for Article 50 and therefore, we have a pretty stark choice.  Either we go off the cliff with no deal which would be disastrous or we go on to sensible transitional arrangements”. He went on to say “We want a vote on it (no deal by March 2019) and I can tell you, we`ll vote against it”.

Adding fuel to the fire, some recent polls have revealed a shift in the public`s stance on Brexit so far.  The latest poll taken by YouGov and GFK shows that as of 11th October, 42% of those polled think it was right to vote leave and 47% indicated that it was wrong. 11% said don`t know. The previous poll asking the same question resulted in 44% saying it was right and 45% saying it was wrong to vote leaving the EU. Again 11% don`t know.  So there seems a shift thus far if you have any faith in polls.  Other recent polls show similar results.  What UK Thinks EU have it here for you to follow.

So, with the flavour of all the above in mind, where are we with Sterling so far after Round 5 of Phase 1 talks are concluded?

G8 currencies:

  • GBPUSD opened last week $1.30974 and closed Friday at $1.32866 after reaching a high of $1.3373.
  • EURGBP opened last week €0.89471 to close Friday at €0.88956 after reaching a low of €0.90326.
  • GBPYEN opened last week ¥147.353 and closed Friday at ¥148.588 after reaching a high of ¥149.248.
  • GBPCAD opened last week $1.63995 to close Friday at $1.65687 after reaching a high of $1.66495.
  • GBPAUD opened last week $1.68404 to close Friday at $1.68404 after reaching a high of $1.70040.
  • GBPNZD opened last week $1.85202 to close Friday at $1.85084 after reaching a high of $1.86930.
  • GBPCHF opened at CHF1.28028 to close Friday CHF 1.29487 after reaching a high of CHF 1.29947.

All-in-all, not a bad Brexit/politics fuelled week for the so-called beleaguered Pound.

More specifically:  Monday 9th saw Sterling rally from a 1-month low on news that PM May hinted at a cabinet re-shuffle, a possible sacking of trouble maker Boris Johnson and speculation of a BoE hike in November.

Tuesday 10th, after up-beat BRC retail sales data in Asian session saw Sterling extend the rally, Sterling rallied Europe on up-beat Industrial and manufacturing numbers, reinforcing BoE expectations despite a report showing the trade deficit at an all-time high.

Wednesday 11th saw Sterling ease slightly in Asia against USD ahead of the FOMC September meeting minutes.  In Europe, Sterling again on Brexit worries as doubts emerged as to whether a BoE hike in November was realistic considering noises coming from Brexit negotiations and UK politics.

The late US session saw Sterling rally on inflation fears from the Fed minutes. Sterling rose to a 1-week high on CB (Fed/BoE) narrowing cash rate policy divergence. (Fed hike December, BoE November).

Thursday 12th saw Sterling consolidating gains ahead of the up-coming Bank of England Credit conditions survey and US data later.  In Europe, Sterling pulled back after the BoE Credit conditions survey showed lenders anticipating a sharp decline in consumer credit availability in the short term due to tightening rules on lending.

Friday 13th saw Sterling extend gains for the 5th straight session on news that the EU might offer the UK a 2-year transition deal to avoid a hard Brexit according to an article in Germany`s Handelsblatt newspaper. Sterling has declined earlier, weighed on comments by the EU`s Barnier regarding the deadlock in talks during Thursday. The US session saw Sterling consolidating gains ahead of US CPI`s. CPI`s missed expectations and markets seemed shocked on the miss. Sterling made further limited gains on USD weakness and then profit taking saw Sterling close the week in positive territory despite the political woes and a few data disappointments together with some good results confirming continued resilience in the economy despite, dare I say it?  Brexit.

DXY opened the week 93.62 with a high of 93.67 and closed the week 92.94 after a low of 92.59 for the week, weighed by CPI`s and retails but still supported by an almost nailed on December hike and a hawkish Fed who just know they need to hike.

UK 10`s remain the safe haven with yields consolidating from an open for the week at 1.375%, a high of 1.409%, a low of 1.351% to close the week at 1.370%.

I’ll follow up with a more in-depth look at the pound shortly.

The Brexit Review is a series of posts covering the latest happenings in the long running saga. You can follow the other recent posts here.

Si Heath
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