UK: PM May provides some reassurance over Brexit deal - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound continues to consolidate at sharply weaker levels following the Brexit vote and has derived support over the past month from building evidence that the UK economy has held up better than feared at least initially.

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“However, the pound price action over the last week giving back some of its recent gains has highlighted that it will struggle to stage a sustainable rebound while Brexit uncertainty still remains elevated. At the current juncture, there is little clarity over the future relationship the UK government wishes to pursue with the EU. The market remains fearful over the risk of a “hard” Brexit which could trigger some fresh selling of the pound if the UK government provides a clearer signal that it is heading that way.

Comments overnight from Prime Minister May have provided some reassurance stating that “the 27 (EU members) will sign up to a deal with us. We will be negotiating with them and as I say we will be ambitious in what we seek for the UK. A good deal for the UK can also be a good deal for the other member states”. Her comments followed recent warnings from the EU’s eastern members that they’ll potentially veto any deal if it is not balanced and protects the free movement of labour principle of the single market.

Overall, we remain comfortable with our view that the bulk of the adjustment lower for the pound has occurred which is now stabilizing at lower levels. After similarly falling sharply following the UK’s exit from the ERM in the early 1990’s and following the global financial crisis, the pound stabilized at lower levels for multi-year periods.”