GBP: UK Prime Minister May’s Brexit speech in focus – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has weakened sharply early in the Asian trading session resulting in cable breaking below the 1.2000-level for the first time since the flash crash on the 7th October.

Key Quotes

“Pound weakness has been driven by heightened “hard” Brexit fears ahead of tomorrow’s keynote speech from UK Prime Minster May in which she is expected to outline further details of her government’s Brexit strategy.”

“The weekend press have speculated that Prime Minister May will use the speech to more clearly signal that the government is willing to walk away from the single market and customs union if it is not able to regain control of the UK’s borders and domestic laws. By leaving the customs union it will also allow the UK to strike its own trade agreements. PM May is expected to signal that she wants the people to unite to build a “global Britain” rather than become more inward looking following Brexit.”

“The speculation is broadly consistent with the message already sent by the UK government since the referendum. It supports our view that the UK government is not planning to remain a full member of the single market.”

“We will be watching PM May’s speech closely to see if the government reveals any further details over the type of bespoke trade agreement that it hopes to achieve. However, we remain doubtful that the she will provide much further details given the government’s view that it could undermine negotiations with the EU.”

“The initial knee jerk selling of the pound overnight on the back of the reports is understandable as they heighten “hard” Brexit concerns. However, the reports should not have come as much of a surprise to the market as they are broadly consistent with the signals that the government had already delivered on its Brexit strategy. The pound has already adjusted sharply lower in response to Brexit concerns which should help to limit the scope for further weakness. It could even prove the case that the pound is close to reaching a low point in the near-term as “hard” Brexit fears are reaching a peak. In particular the pound could begin to rebound against the euro in the coming months when the market’s focus is likely to shift more towards heightened political risks in Europe.”