Brexit bill continues to make headlines but GBP is proving resilient - Nomura

The research team at Nomura notes that once again the topic of the “Brexit bill” is driving GBP news with comments from Theresa May and David Davis that “money paid in the past” by the UK must be taken into account in the final divorce bill (Theresa May) and that the “UK will walk out of the talks if the EU demands €100bn” (David Davis, Brexit Secretary).

Key Quotes

“Mr Davis added that the negotiations would be plunged into “crisis” from the start because the EU refused to discuss a trade deal until Britain agreed to pay the “Brexit bill”. If this were to be a “walk out of the room” moment, it may be cause for concern. But at this stage it could still be seen as political posturing during an election campaign, when trying to win over previous UKIP voters and is only a possibility not a certainty. As we have seen many times in elections, what is said aloud to win undecided votes is not always what is delivered and should not be the primary driver of price action right now.”

“The market implications of the Brexit negotiations are large – it is why GBP is 10% lower since the vote. But to extrapolate the pre-negotiation commentary of the Brexit bill proceedings into a trade will prove tiresome as the outcome will not be known for many months to come. If we take a look at the Brexit timetable below, we’re a long way from any concrete knowledge on the Brexit proceedings, so now the outcome of the UK election will likely dominate the headlines.”

“Brexit bill “flash points” newsworthy for GBP, but fundamentals continue to shine

Once the election is out of the way, it will continue to be the outperforming economic data and the BoE that will move markets. The BoE’s Inflation Report forecasts were more dovish than market expectations. But there has been BoE communication actively talking up the market to price in a steeper curve (the May Inflation Report, for example) with some members close to voting for a hike. So the risk-reward from these levels is to position for a further hawkish BoE tone in months to come. While the MPC may not hike anytime soon, it may continue to ask the market do some tightening for it (the so-called “Maradona-effect”) that would naturally be GBP supportive. 

Strong political gestures from both sides will be newsworthy, but it would take a lot to change materially the outcome assuming both sides remain pragmatic. This assumption in itself is up for debate, but when taking into account the joint cost functions of both the EU and UK, it’s hard to see either side aiming for a non-amicable solution. So the flashpoints could cause short-term market worries providing better levels or short-term trades in our view rather than changing the ultimate course of proceedings. Therefore, we remain long GBP via a basket of USD, EUR and AUD.”