Since the European Union referendum, nothing has quite impacted the price of sterling like the head-spinning drama of the Brexit process.
Therefore, with the Chequers Summit in July, it was widely assumed that the pound would either soar or plummet, depending on the latest storyline to come out of Buckinghamshire. And it did not disappoint. Prime Minister May dropped a soft Brexit white paper bombshell, hard liners revolted and the front pages were splattered with political blood.
However, despite the resignations of key Brexiteer Cabinet ministers Boris Johnson and David Davis in the aftermath, many were surprised to see GBP unmoved.
In the past couple of years, Sterling has tended to react one of two ways. It either climbed following news of a softer, business-friendly Brexit, or took a turn for the worse following any radical hard Brexit signals.
Figure 1: GBP/USD, June 2016 – July 2018
The figure above displays the rollercoaster of sterling moves over the previous two years and the three specific points circled demonstrate specific cases where Brexit saw direction shift dramatically.
The first shows sterling plunge as Theresa May announced her intention to leave the common market in her Global Britain speech. The announcement was her first commitment to an act widely presumed to lead the UK down the path of a hard Brexit. As a result, Sterling plunged to $1.204, its lowest level in 32 years.
The second point shows the opposite end of the spectrum. After gradually climbing for a few weeks, sterling hit a post-referendum peak towards the end of January 2018. This was triggered by the European Union signalling its intention to agree to a post-Brexit transition period. This announcement was perhaps the biggest boost to a soft Brexit the Remain camp had received since the referendum and it subsequently boosted sterling to $1.426.
The final point highlighted sterling’s slide in value following a post-referendum peak in April. At the end of April, the European Union’s chief Brexit negotiator Michel Barnier indicated there would be a no deal scenario if the border between Ireland and Northern Ireland was not secured. This announcement followed a week of steady decline and left sterling lingering on $1.358.
Returning to the Chequers Agreement, one could have assumed that GBP would have been spooked or emboldened given the noise coming out of the country estate. But it was just that – noise. Theresa May has already been forced to stand down on a number of her provisions to satisfy the Brexiteers, and as is the case with every twist and turn in this divorce saga, Europe could easily flat out refuse to accept the Agreement.
What we may be seeing is a market that’s used to the hot air and inaction on the part of the UK government. Perhaps can finally see past the headlines and keep a level head while our politicians continue to lose theirs.
In the coming weeks and months, the deal the UK strikes with the European Union will become clearer and the pound may react accordingly. Talk of a no deal will likely see sterling collapse.
Remember what happened to sterling as it became clear that we had merely voted to leave the European Union? Most market participants still thought that Brexit would leave the UK members of the single market and with broad equivalence of regulations in place. Some close to Westminster suggest that that the best we could hope for is an extension of Article 50, something recently floated by Irish Deputy PM Simon Coveney.
Brexit has generated more heat than light, and more headlines than actual news since that night back in June 2016. At the moment, GBP has all the hallmarks of the currency market equivalent of the 1000 yard stare.
News will continue to matter for the pound, headlines will likely not. If all we get out of Westminster and Brussels is rhetoric, then we are set to enter a lull before what could be an almighty storm in eight months’ time.
Jeremy Thomson-Cook is Chief Economist and Head of Currency Strategy at WorldFirst.
