- Pound surges on misguided headlines
- Exaggerated euphoria is nothing new
- Expect sterling volatility up until the final handshake
Don't be fooled by the sudden euphoria in FX markets yesterday generated by the EU's chief Brexit negotiator Michel Barnier who reportedly said, "we are prepared to off Britain a partnership such as there never has been with any other third country." The pound surged on the news.
Yet history shows that misguided headlines around a still non-existent EU-UK divorce settlement have caused currency markets to overreact—pushing cable higher for only brief periods, many times before. This time will be no different.
Here We Go Again
The last time a similar pop occurred was on March 19 news broke that the UK and EU had agreed to a 21-month transition period following Britain’s departure from the economic bloc:
While the jump on that day mirror's yesterday's price action, it should be noted that the move from 1.39 to 1.40 is a significant 10 cents above current levels.
Yesterday began as a typical news day for Brexit politics with headlines. At one point early in the day UK Brexit Exit Secretary Dominic Raab told the House of Lords’ EU Committee, “I'm confident that a deal is within our sights.” This was the same thing that has been said all year and markets largely ignored the comment.
But Barnier's comment sounded more hopeful—and way more promising. Lost in the euphoria, was the remainder of his statement, which made thinks much clearer: the EU’s position on “no cherry-picking” had not changed. “We respect Britain’s red lines scrupulously. In return, they must respect what we are,” he said. “Single market means single market ... There is no single market a la carte.”
Thursday’s trade is already showing trader skepticism over yesterday’s move; at the time of writing, GBP/USD was last down close to 0.15% moving away from the intraday high of 1.3043. Cable is still down around 3.8% year-to-date and is off 9.5% from the April 17 high of 1.4378 as elation from the transition deal faded into the realization that both parties have yet to make significant progress. As well, Barnier was already been clarifying today that all possibilities remain in play and a no-deal Brexit outcome is an integral part of the EU’s forward planning.
Cable's Downward Trend Expected To Continue
Given the pound's downward trend this year, one day of euphoria should do little to convince traders that risk is off. With just eight months to go until the official divorce date, nothing has been accomplished by negotiators on either side to convince market participants they have nothing to worry about.
Logic would dictate that British and European politicians have no interest in wreaking havoc and that a complete “no deal”, or “hard Brexit”, is an unlikely outcome. EU politicians have already admitted that nobody benefits from a no-deal Brexit. But the final outcome remains illusive.
Politics suggests that the UK and EU should end up shaking hands and telling their constituents that the other side caved and they won no matter what the reality is. Until that happens, expect further volatility in sterling with the occasional relief bounce when one politician or another says absolutely nothing concrete at all.