Brexit and Sterling ..... just quickly, some thoughts on the run ..... not always a wise idea !

ref :- General

The battle-scarred British Pound finally got a much-needed fillip yesterday when the EU's chief negotiator Michel Barnier, not someone known for offering unwarranted encouragement, said that a specially bespoke deal for post-Brexit Britain was in the pipeline. The pound jumped about 1%, to above €1.11 and $1.30, and by and large has hung on to those gains despite M. Barnier reverting more to type by reiterating this morning that the EU should also prepare for a "No Deal" outcome.

Regulars will know that we long ago took the decision not to comment constantly on the whole Brexit thing. Our idea of hell would have been to write about Brexit on a daily basis for a few years (as many outlets have done), bigging up the latest insignificant developments in negotiations into crucial "breaking news" when in reality nobody could possibly have any idea of what the outcome would eventually be, and probably still don't. We have felt the need from time to time to make the odd observation, such as when GBP / US$ was trading well above $1.40 back in April. That seemed to us to be putting a surprisingly high valuation on sterling (and sterling assets) when the future was still so unclear, and conceivably so dark (strictly from a trading point of view, of course).

And the future still is unclear, with the UK's Dominic Raab pointing out that the October deadline ain't going to be met, and both sides reminding everyone of the need to prepare for No Deal. If we had heard anything tangible, sterling would surely have benefitted by a lot more than 1%.  And yet ...... and it goes against all we've said to read too much into it ..... M. Barnier's change of language, however fleeting, is at the very least interesting.

We have little doubt that even if ultimately a compromise deal is successfully cobbled together , there will still be just as much pessimistic noise in the media in the meantime. But M. Barnier's comments yesterday must prompt traders to ask what the reaction would be on foreign exchanges if and when it begins to look like a deal that is not obviously punitive to the UK really is likely. And the obvious answer, with which we wouldn't argue, is that there will be a (very) sharp and immediate adjustment higher for the pound. After all, of the possible outcomes on the cards, that would be the one that investors and traders (if not necessarily arch-Brexiteers) would view as the most beneficial to UK Ltd.

The next question must be "how long would the bullish sentiment last ?". Well, that would, of course, depend on the speed and extent of the early moves but there's a reasonable argument to be made that sterling's renaissance could well be a short-term thing. Yes, in the eyes of the market the UK would be in a better position than it might have been but would still face an uncertain future. Hardline Brexiteers would no doubt proclaim Britain's ability to make a real success of things outside of the EU. Who knows, they may be right ..... but it might be difficult to convince less politically-motivated observers of the UK's bright prospects outside of the single market.

While we're on the subject of politics, we'd better widen the scope of possible scenarios. A compromise deal acceptable to both sides is unlikely to satisfy those Brexit hardliners we were talking about. They would want something little short of a clean break, and since many of them are in the ruling (well, sort of) Tory party, under the leadership of Boris Johnson say (just to pick a name out the hat!) they might cause serious problems for PM Theresa May. Even if she could survive a leadership challenge, she would then be in charge of a slim minority government in which a good number of members of her own party may have recently tried to oust her. "Vulnerable" wouldn't begin to cover it.

That opens up the possibility (likelihood ?) of the current government being replaced by a pretty radical, seventies-style socialist alternative ..... and whatever your personal views on that, you can be certain that the markets would not approve.

So ..... what does it all mean ? It means that IF a deal begins to look likely, then, of course, we should expect a steep rally in the short-term. But that's a long way from saying that everything in the garden will be rosy, and looking further ahead sterling's historically bumpy ride on foreign exchange markets seems set to continue.