Market News & Insights
9 July 2018

Sterling Solid Despite Davis Departure

Last week closed in positive territory as markets looked away from trade wars and tariffs and back on data and towards global economic growth. In the UK PM Theresa May sourced an agreement on her Brexit proposals as cabinet agreed on a more friendly (see soft) customs model. Stocks closed the week higher, the USD was weaker despite better than expected figures from Fridays NFP report, while the euro and GBP were also both firmer on the day. However things this morning are not looking as rosy.

The Brexit proposal agreed by the UK government will avoid trade frictions, creating a free trade area with the EU whilst allowing the UK to negotiate new trade deals. Over the weekend the headlines highlighted the progress made, with the EU’s chief negotiator Barnier saying they would assess to see if the UK’s proposal was realistic and workable. It certainly sounds very much like the UK proposals suggest they want to have their cake and eat it and it is this that likely contributed to the resignation of the UK’s Brexit negotiator on Sunday along with several other cabinet members. In his letter to the PM, David Davis’s outlined that the UK’s proposal would leave them at a distinct disadvantage and a weak negotiating position with the EU, fearing they would have to make concessions to achieve their objectives as key terms and conditions (he thoughts were agreed) were omitted from the final proposal. There is no doubt that Davis has had his run ins with the PM over the last year, however he now feels like delivering the outcome of the referendum is less and less likely and as such his resignation now creates a hole at a time when the UK need to be presenting a united front to the EU.

GBP has started the day on a firmer footing, totally discounting and risk from Davis’s departure. Like all things Brexit I’m not going to hold my breath until we hear something concrete back from the EU. EURGBP has rallied back above 1.3300 to welcome in the week, 1.3460 is next major resistance to the topside should we see the pound accelerate further 1.3280 marks Friday’s close and likely support to a move back to the downside. EURGBP is currently trading around .8820/30 area, which has provided support. Next level lows is around .8800 and a drop back below there would bring the pair back into the lower range. A rally in euro should run up short of .8870. I’d be somewhat sceptical of GBP strength, markets are pricing in a rate hike from the BOE in August and I can’t help feel the market has misinterpreted the BOE’s intensions here. While Q2 certainly saw a bounce back from the weaker Q1, I don’t think it’s enough to warrant tightening policy, especially with major risks around the corner for the UK. But always I’ll wait until a see the data to back this up and tomorrow should kick start that with the office of statistics publishing their first monthly estimate of GBP.