Brexit Bulletin: Hard Talk Hammers Pound

Sterling trades below $1.20 as investors brace for hard Brexit.

Saywell: Pound Probably Around Most Extreme Level

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Hard Talk Hammers Pound

The pound again bore the brunt of Theresa May’s Brexit planning, falling beneath $1.20 (then recovering slightly) after newspapers reported she is prepared to leave Europe’s single market and customs union to regain control of immigration and law-making.

The fall was the first time the pound had dipped below $1.20 since October’s “flash crash,” when it plumbed a three-decade low of $1.1841. Meanwhile a measure of anticipated swings for the currency climbed to the highest in three months.

Sterling slid against all of its major peers ahead of the U.K. prime minister’s much-anticipated speech on Tuesday. Equities also fell and gold climbed.

Downing Street declined to comment on speculation, but said May will call for a “new and positive relationship” with the European Union.

Making investors more jittery is the Sunday Times’s citing of government officials as saying they expect her comments to cause a further “market correction.” Bloomberg’s Tim Ross and Svenja O’Donnell report the Treasury intends to speak to major banks after May’s speech to smooth the reaction.

Traders have previously viewed May’s pronouncements on Brexit as a reason to sell the pound, with her words fanning speculation she is prioritizing social issues such as clamping down on foreign labor over the trading needs of the economy.

While May has repeatedly refused to give a “running commentary” on her strategy, Bloomberg’s Alex Morales proves she has actually said quite a bit on topics from trade to the courts since taking office six months ago.

Trump Card

May got a boost on Monday as U.S. President-elect Donald Trump said he will offer Britain a fast and “fair” trade deal.

Donald Trump, president and chief executive of Trump Organization Inc. and 2016 Republican presidential candidate, leaves a news conference ahead of a rally at Grand River Center in Dubuque, Iowa, U.S., on Tuesday, Aug. 25, 2015.

Donald Trump will be inaugurated as U.S. president on Friday

Photographer: Daniel Acker/Bloomberg

Reversing the warning of President Barack Obama that the U.K. would be at the “back of the queue,” Trump told The Times “we’re gonna work very hard to get it done quickly and done properly. Good for both sides.”

“Brexit is going to end up being a great thing,” he said, predicting other countries will leave the EU.

The olive branch will reinforce the view of those who campaigned for Brexit that the U.K. can prosper once it’s free to sign its own trade pacts. It will therefore make leaving the customs union more appealing, reinforcing May’s hand in the divorce talks by allowing her to highlight she has opportunities outside Europe.

Toughening Up

The U.K. government signaled it is toughening its stance towards the EU.

Chancellor of the Exchequer Philip Hammond laid down the gauntlet by telling Germany’s Welt am Sonntag that the U.K. will do “whatever we have to do” to boost its competitiveness if it can’t access the EU’s market after Brexit. That was interpreted as a hint he could cut corporate taxes and employment rules.

Hammond was criticized by opposition Labour Party leader Jeremy Corbyn for seeming to threaten a trade war. Norbert Roettgen, chairman of the foreign affairs committee in Germany’s lower house of parliament, told Die Welt that Hammond’s comments are “an expression of Britain being at a loss.”

The Guardian also reported the Netherlands plans to block any EU trade deal with the U.K. unless the British pledge not to start a “race to the bottom for profits taxation.”

LONDON, ENGLAND - JULY 14: David Davis, Secretary of State for Exiting the European Union, arrives at the Treasury on July 14, 2016 in London, England. The UK's New Prime Minister Theresa May began appointing the key Ministerial positions in her cabinet shortly after taking up residence at Number 10 Downing Street. (Photo by Jack Taylor/Getty Images)

Brexit Secretary David Davis

Photographer: Jack Taylor/Getty Images

Meantime, Brexit Secretary David Davis said the EU could “fail” if the negotiations don’t end with a strong new trade agreement. European leaders repeatedly say Britain can’t have a better deal outside the EU than inside.

Klaus Regling, chief executive officer of the European Financial Stability Facility, told Bloomberg Television on Monday that the U.K. will be the biggest loser from a “hard Brexit” because it will reduce foreign investment. Former Bank of France Governor Christian Noyer said “it’s mostly a risk for the U.K.”

Inflation Worries

The declining pound risks complicating life for Bank of England Governor Mark Carney.

As he prepares to deliver his first speech of 2017 on Monday, sterling’s weakness is threatening to push up inflation, which is already rising at the quickest pace since 2014. That risks limiting the ability of the central bank to support economic growth with easy monetary policy.

For now, the median forecast of economists surveyed by Bloomberg News is that there will be no change in interest rates until at least the second quarter of 2019, the year Carney will step down. When that move comes, the survey suggests a greater likelihood it will be a hike than a cut.

Brexit Bullets

  • Brexit blues said to hit Brussels as morale of U.K. envoys suffers
  • Labour to demand lawmakers get to vote on final Brexit deal, says Sunday Telegraph
  • Barclays Chairman John McFarlane tells Sunday Times that keeping passport rights for banks “is obviously the most attractive option, but not necessarily the easiest to achieve”
  • Brexit will help strengthen Frankfurt if Deutsche Boerse eventually purchases the London Stock Exchange Group, according to research commissioned by the German exchange operator.
  • Lawmakers tell May to release Brexit plan by the middle of February
  • EU negotiator Michel Barnier denies Guardian report saying he wants special Brexit deal for London banks
  • Open Britain poll says 54% of Leave voters not willing to be a penny worse off in return for control of immigration
  • ECB and U.K. advised to share oversight of euro-clearing by lobby group Financial Services Negotiation Forum
  • London homeowners showing “marked reluctance” to sell property amid uncertainty, says Rightmove.

And Finally...

As the World Economic Forum prepares to kick off its annual meeting in the Swiss ski-resort of Davos, delegates may be a little more cautious after their failure to forecast the key events of last year.

A year ago, then-Prime Minister David Cameron used the gathering to say his aim was “absolutely clear” and that he wanted to “secure the future of Britain in a reformed European Union.”

Eurasia Group President Ian Bremmer, UBS Chief Executive Sergio Ermotti, Dutch Prime Minister Mark Rutte and then-French Prime Minister Manuel Valls were among other who doubted Brexit would win.

And as for those who expected to be following the inauguration of President Hillary Clinton during Davos 2017...

For more Davos coverage, see our special report on the World Economic Forum 2017.

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