BOE reaction and Article 50 ruling when uncertainty can be good for the markets

BOE reaction

The increased uncertainty around this morning’s court ruling has not impacted the BOE, its latest Inflation Report had a clear hawkish slant. It revised up its growth forecast for next year, although it said that the economic outlook could be weighed down by Brexit risks. However, it is inflation that has stolen the show today. The BOE expects above target (2%) inflation for the whole forecast period, and has said that there is a limit to the BOE’s tolerance for high prices. Thus, we expect the market to rapidly price out the prospect of the BOE cutting rates in the coming months, and even years. GBPUSD has reacted to this news by rallying back to earlier highs, we could see the pound break back above 1.25 on the back of this, and open the way to a higher range for cable between 1.25 and 1.30, at least until the December court ruling on Article 50. Also watch EURGBP, which has come under intense pressure today, and is down more than 1.5%. If this Inflation Report is backed up by a hawkish slant from Carney at his press conference later, then we could see further downside for EURGBP.

We will send out a more detailed BOE report after Mark Carney’s press conference later this afternoon.

Article 50 ruling: when uncertainty can be good for the markets

The High Court decision today, which could force the government to hold a vote about  triggering Article 50, throws the UK’s position post the EU referendum into uncertainty.  Not all uncertainty is the same for financial markets, this time it could be good news for UK asset prices. PM Theresa May has issued a statement following the decision, reiterating that Article 50 will be triggered by March next year, but her words mean nothing. If Parliament votes against it, then how can Article 50  happen. The Brexiteers at Westminster must be fuming, but this is the law. Although this is likely to go to appeal, which won’t be heard until next month, whether or not Article 50 will be triggered may depend on a Parliamentary vote. If this decision is upheld, then can assume that MPs will vote based on what their constituents voted for back in June, however there are some signs that some Brexit voters may have changed their mind now that the pound has fallen and inflation has moved higher. MPs, particularly some Labour MPs, may try and canvas opinion on Brexit now that the dust has settled on June’s vote, if it looks like people who voted for Brexit back in June but have now changed their minds, MPs may vote based on the latest views of their constituents rather than the referendum result. Thus, the outcome of today’s ruling, although it is not final, does bring in the spectre of Article 50 not being triggered at all.

This decision has increased the uncertainty around the UK’s decision to leave the EU. While normally uncertainty is bad for the markets, this time it is good for the pound. GBPUSD tested 1.2450 earlier, and remains at its highest level since before the sterling flash crash last month. Gilt yields are also rising, and prices falling, also suggesting that investors’ nervousness around Brexit is receding. The FTSE 100 is lower, but this is largely a result of global equity weakness and the FTSE’s  inverse correlation with the pound, so when the pound rises, the FTSE 100 may come under pressure.

For the UK, uncertainty is good, because the market has convinced itself that Brexit is bad news for the UK’s future economic prospects. Although this is not a done deal, and the legal case could be trawled through the courts for some time yet, if it looks like there is a chance that Article 50 may not be triggered then we could see a large turnaround for the pound, which has lost nearly 20% since the Brexit vote. We would expect the pound to trade with an upward bias from now until the appeal decision, sometime in December.