Theresa May, and it's time to Grasp the Nettle ..... it's bound to hurt a bit.

CREDIT: JUSTIN SUTCLIFFE 

Theresa May, and it's time to Grasp the Nettle ..... it's bound to hurt a bit.

ref :- "May's Brexit plan : what we know so far" , The Financial Times

We try quite hard to avoid the Brexit issue, or at least not to get overly obsessed on a daily basis by a subject that going to rumble on for at least another two years or more. Sometimes it's inescapable, however .....we are supposed to be keeping an eye on markets, after all. Brexit's huge influence on foreign exchanges and by extension on interest rates and the value of assets (both stocks and bonds) in the UK means sometimes , quite often in fact, it fits the bill better than any other subject.

Today is such a day ..... and with much of the US closed for Martin Luther King Day it's likely to remain the centre of attention. Overnight in thin conditions in Australasia and the Far East GBP / USD dropped 1.6% to below $1.20, and fared barely any better against the Euro, making a low fractionally above Euro 1.13. It's possible that some holders of sterling might take comfort in the fact that the busier European centres did not follow through even further, but it has to said that there seems to be little confidence that the Pound has found any sort of base yet.

Source of all this renewed bearishness is of course UK PM's speech tomorrow, in which she is expected to set out her Brexit plan as she promised to do before triggering Article 50. If Mrs May's last two major speeches prompted waves of sterling selling by pointing to a "harder" Brexit, traders are getting their selling in before the event this time in full expectation that there will be little compromise on key issues.

It is thought that in contrast to her form up to now Mrs May will try to strike a more conciliatory tone and calm fears that Britain will take a hostile approach to negotiations. If that's her intention, she's probably not been helped by Chancellor Philip Hammond warning that the UK could go down the route of becoming a low-tax competitor if Europe played hardball on market access issues. When pressed by Die Welt on whether "Britain as tax-haven" was a possibility, Mr Hammond came out with his "the British people are not going to lie down ...." line, which on the face of it doesn't sound over-conciliatory to us.

Besides, even if Mrs May was to come across as all sweetness and light (a slightly incongruous mental image), what we KNOW  --  or at least, what we think we know  --  about the exit plan means that scope for compromise is pretty limited. Everything that she has said up til now points to two areas in which the UK's position will be clear and immutable : to regain control of (EU) immigration, and to no longer be under the jurisdiction of the European Court of Justice. Since Britain is seeking to withdraw from these two tenets of participation in the single market, it seems that it must be readying itself for withdrawing from the single market too. There may be room for manoeuvre on the more complicated customs union, but on this issue the UK and the EU will not be able to come to terms..... and that means a "hard" Brexit.

At least, that's what the market is thinking and that's why sterling is under the cosh again. Actually, one could easily take the view that since the pro-Brexit vote was all about immigration and restoring full control of the judiciary (and other institutions) to within home borders, then the government was mandated NOT to give any ground on these points. Ergo, it follows that Britain's farewell from the single market should come as no surprise whatsoever. Well,quite ..... but any development that lessens the chances of attaining the kind of consensual middle ground recommended by a majority of economists and therefore desired by markets means that sterling is likely to remain under the severest pressure.

Without any specific inside knowledge whatsoever, we suspect that behind-the-scenes discussions will ultimately yield some dividends for both sides but traders like headlines. Sterling bulls (yes, there are a few down at these levels) may point to Donald Trump's upbeat assessment of Brexit at the weekend (well, he IS pals with Nigel Farage) and his enthusiasm for a US / UK trade deal asap. But as we saw at Mr Trump's press conference last week, he can be long on gusto and short on detail whatever the subject, and his thoughts may not be most important factor in setting the value of the Pound.