UK: Tough rhetoric from Tusk plays into ‘Hard’ Brexit pricing

Derek Halpenny, European Head of GMR at MUFG, notes that the pound is back under selling pressure today after some tough words from EU President Tusk.

Key Quotes

“In a comment that will no doubt chime in the media over the coming days and in a rebuke to the optimism expressed by Foreign Secretary Johnson, Donald Tusk stated that the UK would not have its cake and eat it in reference to taking back control of borders and maintaining access to the Single Market. Instead Tusk added there would be no cake and only “salt and vinegar” as there is only a ‘Hard’ Brexit option. That would be the same for the EU as well with no winners from the decision of the UK to leave the EU.

But in a sense, similar to the reluctance of the market to price in any increase in probability of a Fed increase with two months still to go, we believe a ‘Hard’ Brexit risk adjustment has taken place and with not only two months to go but two years of negotiations to go, market participants will likely await some further time before any additional risk adjustment takes place. With an element of uncertainty over the timing of invoking Article 50 due to the legal challenge now also in the mix, there is likely to be a reluctance to sell the pound further on ‘Hard’ Brexit rhetoric like we heard from Donald Tusk yesterday.

Finally, the Unilever/Tesco ‘Marmite battle’ is over and a deal has been reached over the pricing of goods after Unilever had demanded a 10% increase in payments from Tesco for. We can only assume that whatever the deal was Tesco will be paying a lot less than what Unilever originally demanded. Might this be a sign that inflation pass-through will not be as great as feared due to companies inability to pass on all the gains to price sensitive consumers? A little less concern over inflation ahead would also help stabilise the pound from a real yield perspective. We continue to believe the selling of the pound is overdone and spot rates have overshot our short-term model fair-value estimates.”

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