I’m not sure if you said the pound would rally 4% in wake of Theresa May’s whopping defeat last week anyone would have thought it possible. However, it’s happened, leaving many concerned the market may be getting a little ahead to itself.
Looking at the situation, the positives are clear. PM May has good ammunition following her embarrassing defeat to try and extract some meaningful concessions from the European Union. The primary focus will be on the Irish backstop. Second to this, the key element of money. £39 billion is set to be transferred across to the EU once the UK departs. Were this amount to be significantly reduced, one could easily envisage certain MPs pushing the Irish border situation to one side to save a few pounds for the UK. Further positivity flows from the prospect of Article 50 being extended, although, even if successful, not only do we ensure more time to choose an outcome but we also ensure more time for game playing and potentially running the clock down to further minimise choice. Lastly, there’s the prospect of another referendum.
On the flipside, the evidence shows so far that May is sticking with her plan to amend her original deal. Essentially plan A is plan B. From the EU’s perspective, are they really going to offer anything significant regarding the backstop? It’s all well and good saying they need us as much or even more than we need them, however, it’s more than apparent they’re content to sit back and watch the UK try and figure this one out ourselves, frustrating people even further in this shambolic negotiating process. In respect to a second referendum, no matter how much staunch Remainers would desire one, it’s still exceptionally far from becoming a reality. I suggest, if anyone’s waiting for GBP to strengthen on the back of a 2nd referendum being created in the next few months then please think hard. Such a referendum would be highly opposed from both benches and would be even more divisive for the nation than this process has already proven.
Is this sterling rally justified? Ultimately, an answer one has to weigh-up using the evidence. One thing we can be certain of – the pound is at its highest level for a number of months. If one goes by the simple mantra, buy when the price looks good – something which has worked exceptionally well across the years, then the euro and US dollar may well appear cheap at the moment.
Heads up – the European Central Bank have a monetary policy announcement at 2345, followed by a press conference at 1330.
Written by Viv Savani. 9:00am, January 24th 2019
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