May’s vision given warm reception by GBP
City Index January 17, 2017 5:55 PM
<p>At the time of writing, Theresa May is just finishing off her much-awaited speech. The details of the speech were well signalled in advance, however, […]</p>
At the time of writing, Theresa May is just finishing off her much-awaited speech. The details of the speech were well signalled in advance, however, talk that this speech could cause a material correction in the pound were completely unfounded and GBP is the strongest performing currency in the G10 so far on Tuesday.
So here are the parts of Theresa May’s vision for Brexit that helped to boost the pound. Firstly, confirmation that Parliament will vote on any final Brexit deal between the UK and the EU. Secondly, the detail around the UK’s proposed new customs deal with the EU that the UK hopes will allow tariff-free trade with the EU, our largest trading partner. Lastly, May’s objective for a 2-year time frame to agree the Brexit deal, and a phased transition phase after that to ensure a smooth transition to the UK’s new reality outside of the EU.
Can the GBP sustain this rally?
This is a rare positive performance for the pound, and GBP jumped by the most since July, as the market rushed to buy the fact after selling the rumour of May’s speech. It is worth remembering that since the Brexit vote last June, rallies in the pound have been fairly weak, while sell offs have been harsh and prolonged. It is too early to know if the negative impact of politics on the UK currency is starting to wane. However, if GBPUSD can continue this rally into the end of this week, and move back towards 1.25, then it could suggest that the UK currency is developing a natural resistance to Brexit.
Why the pound rallied on the back of this speech:
Overall, this speech did deliver some of the much-needed detail that the market has craved since the June vote. The UK will not be in the single market, but it still wants access to it through a renegotiated customs union. She also warned the EU, not to push for a punitive deal for the UK, otherwise there will be consequences. May will be no push over during these negotiations.
The fact that the government will put the final deal to a vote in both Houses of Parliament seems to be the rallying cry for sterling, as it could limit some of the excesses of some of the Brexiteers. But, even this concession cannot hide the fact that the UK wants the best parts of the EU, with a cherry on the top, which could make the next two years’ extremely tense. So, the pound is not out of the woods yet.
May has Trump to thank for GBP boost
Although most people will attribute the pound’s jump to May’s speech, the recovery can also be attributed to soon-to-be US President Trump who boosted the pound in two ways: 1, by talking down the dollar overnight saying that the US currency was too strong, and 2, when he said in an interview with The Times that the UK is at the front of the queue for a trade deal with the US. May literally has a ‘Trump card’, which could give her negotiating power over the EU during the Brexit discussions.
So, right now the pound is in a strong position to continue this rally, but we must remember that it is not only because of May’s speech. Brexit still has the power to be problematic for the pound, but the correction we are currently seeing could be extended. Now that GBPUSD has broken above 1.23, we look for a move towards 1.25 in the next couple of days.
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