UK: Adjustment lower for the pound to continue – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the Brexit shock has resulted in the expected sharp adjustment lower in the pound and more modest weakness in other European and high beta emerging market currencies. 

Key Quotes

In contrast, it has boosted the appeal of the traditional safe haven currencies of the Swiss franc, yen and US dollar. It fits with the consensus view that the UK economy will be hit hardest by the negative Brexit shock, the rest of the European economies more modestly and the global economy even less so.

We also see little to no relief for the pound in the foreseeable future which should remain under downward pressure, although it is unlikely to continue falling at such an alarming rate as during the initial Brexit shock phase. Heightened economic and political uncertainty in the UK will not ease in the near-term. The result of the Conservative Party leadership contest will be announced on the 9th September. Home Secretary Theresa May and Leading Brexit campaigner Boris Johnson are the two leading candidates to be the next Prime Minister. 

The main opposition party is also in a state of disarray. Jeremy Corbyn has refused to step down as leader of the Labour Party following an overwhelming vote of no confidence from his own MPs by 172 to 40 votes. The FT has reported that a reasonably swift two-month leadership contest is now expected which Jeremy Corbyn expects to win with the support of the unions and hard-line “Cornynista” supporters. The negative impact on the UK economy will begin to become more evident in the coming months as well justifying further BoE monetary easing and weighing on the pound.   

Once new leadership is in place of the Conservative party, a decision will then be made on whether to hold a general election later this year. Market participants are anxiously awaiting for further clarity from the UK government over what form of future relationship it wants to secure with the EU. Retaining closer access to the single market would be viewed more favourably. However, it will involve trade-offs as President Cameron highlighted clearly yesterday to EU leaders that they would have to accept that voters in Britain could not accept the free movement of workers as an entry price.

At the current juncture it is far too early to accurately predict what the future trading relationship between the UK and EU will look like. The only certainty is that the current trading relationship remains in place until the UK leaves the EU. The timing of the UK’s exit from the EU is uncertain although is currently expected in 2019 assuming Article 50 is invoked later this year or early next  year.”