The Great Brexit Haggle
Brace yourselves. Tomorrow's activation of Article 50 will trigger an avalanche of detail from both Britain and the European Union on how talks will develop.
From the EU, there will be draft guidelines before the end of the week, and possibly its entire negotiating mandate. In the U.K., the government will publish details of its so-called Great Repeal Bill, legislation that will eliminate or retain swathes of European rules accumulated over more than 40 years.
It's here where the greatest risk lies for sterling. It's almost impossible not to see there being big obstacles to a smooth passage.
There's very limited time in which to make an awful lot of major decisions very quickly. The extent to which the country and the City of London can continue trade with the minimum of new barriers will be the key driver of how markets fare between now and when the U.K. actually leaves the EU for good in 2019.
The absence of a Plan B or even a safety net is bound to cause intermittent scares.
The best barometer of how Brexit is faring will be in the currency and bond markets since the FTSE 100 index has been driven higher by the international reach of its membership and the boost the falling pound has given to earnings in foreign currencies.
Since the September flash crash, the pound has managed to arrest its fall against the dollar and for the past few months successfully hold in the new lower range. But its recent strength is much more predicated on dollar weakness following the failure of President Donald Trump's healthcare reform bill.
Against the euro, the pound remains mid-way in its range since the initial plunge after the shock Brexit vote. All left to play for in the negotiations then.
The U.K. economy has fared surprisingly well following the Brexit vote, but a lot of the good news is now priced in. Politics may well take over from monthly statistics driving prices. As there is little prospect of the Bank of England altering its rate path, bar a protest vote from a departing MPC member, there is little to propel sterling forward on its own merits.
Gilts look vulnerable now the market's fix of quantitative easing from the Bank of England has dried up. The central bank will reduce its bond purchases by 70 billion pounds this year, something that will be hard for the market to adjust to.
Relative to U.S. Treasuries, gilts look expensive, with the 10-year yielding 120 basis points less.
As we begin the great haggle, a firm hand on the tiller from Theresa May along with a reasoned approach from the EU-27 negotiators will be needed to keep sterling assets from losing their poise.
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