Brexit Briefing: Divorce Talks Set to Start Monday, Focus for Pound


Talking Points

UK Brexit Minister David Davis flies to Brussels Monday to begin the negotiations leading up to the UK’s exit from the EU.

Despite the surprise vote Thursday by three UK policymakers to raise interest rates, it’s Brexit and politics rather than rates that will likely determine where the British Pound goes from here.

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The UK’s Brexit minister David Davis is scheduled to fly to Brussels Monday to begin the talks likely to lead to the UK’s exit from the EU and it is these talks rather than monetary policy that are likely to determine the strength or weakness of the British Pound in the months ahead.

On Thursday, three of the eight members of the Bank of England’s monetary policy committee voted unexpectedly for an increase in UK interest rates and, although they were a minority and rates were left unchanged, the British Pound jumped higher.

Nonetheless, its subsequent slide back reinforces the view that the Brexit talks are what matters for the currency long-term, along with the still-chaotic state of British politics. The ruling UK Conservative Party has still not reached a deal with Northern Ireland’s Democratic Unionist Party and, although one is expected soon, the delay has highlighted the weakness of Prime Minister Theresa May after her unnecessary decision to call a General Election backfired spectacularly and she lost her majority – forcing her to woo the DUP.

However, the Queen’s Speech has now been scheduled for next Wednesday. That marks the formal state opening of parliament, in which Queen Elizabeth reads out the government program, and suggests that May is confident she will have an arrangement with the DUP by then, preventing the program from being voted down by the other opposition parties.

Against this background, the British Pound’s response to the news that three dissenters had voted for a rate rise was telling: after an initial jump higher it soon fell back.

Chart: GBPUSD Five-Minute Timeframe (June 15, 2017)

Brexit Briefing: Divorce Talks Set to Start Monday, Focus for Pound

Chart by IG

That slippage was due partly to the realization that all three are “external” members of the central bank’s monetary policy committee and that all the Bank’s employees had voted for rates to be left unchanged. Also, one of the three is about to leave and two new members are to be appointed, suggesting that the dynamics will soon change.

However, the slide also emphasised that what’s important for the Pound right now is the shape of any Brexit agreement. If the talks are cordial and a deal can be reached – a so-called “soft” Brexit – the Pound will benefit. If there’s a “hard” Brexit in which the two sides squabble and fail to do a deal, it will suffer. Similarly, if the socially-conservative DUP demands too high a price for its cooperation, the resulting chaos could hit the Pound hard.

For now, GBPUSD seems most unlikely to break through resistance just above 1.30, where it has stalled several times previously, while a slide back towards 1.25 seems rather more likely.

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— Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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