UK: Pound slide continues as hard Brexit concerns remain in focus - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound continues to remain under selling pressure in the near-term fuelled by comments from UK PM May which signal that the government does not plan to remain a member of the Single Market.

Key Quotes

“In her keynote address to the Conservative Party Conference, she provided her vision for the UK after the Brexit vote.

In the keynote speech she stated that “it is, of course, too early to say exactly what agreement we will reach with the EU.  It’s going to be a tough negotiation, it will require some give and take. And while there will always be pressure to give a running commentary, it will not be in our national interest to do so. But let me be clear about the agreement we seek. I want it to reflect the strong and mature relationships we enjoy with our European friends. I want it to include co-operation on law enforcement and counter-terrorism work. I want it to involve free trade, in goods and services. I want it to give British companies the maximum freedom to trade with and operate within the Single Market — and let European businesses do the same here. But let’s state one thing loud and clear: we are not leaving the European Union only to give up control of immigration all over again. And we are not leaving only to return to the jurisdiction of the European Court of Justice. That’s not going to happen. We are leaving to become, once more, a fully sovereign and independent country — and the deal is going to have to work for Britain.”

The initial negative pound reaction highlights unease that giving up membership of the Single Market will hurt the UK economy, while there is little reassurance at this stage over the form of trade agreement that the government will realistically be able to secure with the EU to help dampen the fallout. The pound is working well as an economic shock absorber. It is now down by round 20% on a trade weighted since late last year which will help offset the potential impact of higher tariffs on trade with the EU. It has resulted as well in a significant easing of monetary conditions in the UK supporting economic growth which is one reason why the economy is holding up better than feared to the Brexit vote shock. The stronger than expected services PMI survey released yesterday provided further evidence of the economy’s resilience.

The stronger performance of the UK economy and extra stimulus provided by the weaker pound provides an opportunity for the BoE to hold back on delivering another rate cut by year end. Comments yesterday from PM May criticising some side effects from the BoE’s loose policy approach has also added some uncertainty although we do not expect it to influence the BoE’s upcoming policy decision. PM May stated that “While monetary policy, with super-low interest rates and quantitative easing, provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets got richer. People without them suffered. People with mortgages have found their debts got cheaper. People with savings have found themselves poorer. A change has to come. And we are going to deliver it”.

The comments are surprising but we do not believe that the government will be pressing the BoE to run tighter monetary policy. Weak global growth conditions and the global savings glut have contributed low rates which are out of the BoE’s control. More likely PM May was inferring that the government was going to implement policy measures to address some of the side effects of loose monetary policies in an attempt to help bring some rebalancing between the winners and losers.”