May clarity could mark sterling bottom

Theresa May’s confirmation of a hard Brexit seems to have had a somewhat counterintuitive impact, highlighting the potential for a market reversal.

• Pound spikes despite Hard Brexit confirmation
• Could pound rally mark the top for the FTSE?
• UK inflation could push the BoE to withdraw stimulus

The pound has caught everyone off-guard today, with a seemingly counterintuitive rally sparked by the one thing everyone has been dreading: a hard Brexit. With much of Theresa May’s speech being distributed prior to the event, this was certainly a sell the rumour, buy the fact moment for the pound. Today could very well mark the beginning of the end for sterling weakness, for May’s bold approach has put everything out in the open, thus reducing the likeliness of further sterling selloffs each time anything remotely resembling a hard Brexit is brought up. Today May indicated that she was willing to undergo a short term, clean cut, rather than slowly bleed out at the hands of resentful EU
 representatives who seek to make an example of the UK.

May’s speech provided clarity where there was uncertainty, and if there is anything markets hate, it is uncertainty. With everything now out in the open, there is a good chance we will see the pound start to recover from here on out. Unfortunately, the potential for a pound recovery means that the FTSE may be on the cusp of a significant downturn, following an incredible start to 2017.

Today’s sharp rise in the UK rate of inflation places the BoE in an awkward position, with the incessant resurgence likely to limit the amount of easing Carney & co can commit to. For those in the US, the prospect of a rate rise matters little, with Trump promising to embark on a huge stimulus package to fill the gaps left by a tighter Fed policy. However, with Mark Carney indicating that there is a limit to the amount of inflation the BoE will withstand, there is a good chance we could see the BoE raising rates just as the Brexit storm starts to move in.