GBP: Weakness in store? - Commerzbank

According to Ulrich Leuchtmann, Analyst at Commerzbank, there is one thing an FX analyst does not have to explain, and that is when Sterling is weakening. However, whenever the British currency does not ease, then that is something that does require an explanation, he further adds.

Key Quotes

“The Brexit negotiations are going far from well. Yesterday Prime Minister Theresa May defended her approach in Parliament. I noticed once again how vague her comments are. We have heard the phrase about the “unique and ambitious economic partnership” many times - too many times! It is high time the Prime Minister addressed the concrete details. The FX market (and the British electorate) would like to know now what this phrase entails. At least more clearly than the government’s contradictory working papers have so far revealed. Of course a Prime Minister might not have to comment on every detail.”

“The relocation of the Galileo ground control station may be an issue for her Ministers to decide. But questions like the free movement of goods and people on the Irish border should be issues managed right at the top. The fact that she rants, instead confirms the prejudices of many observers: the British government seems to be out of its depth when it comes to the Brexit issue. That is relevant for the FX market as this more than encumbers the negotiating process and as the risk of accidents rises, the risk that the end result will turn out in a way nobody wants it to - and thus in a way that is GBP negative.”

“And yes: Sterling would also lose out against the euro in a scenario such as that. That is something the British government does not understand and many British people I talk too do not understand either: an agreement in the negotiations is not a matter of life and death for the EU Commission. On the contrary, they can gain support here on the Continent by remaining firm.” 

“So why aren’t we seeing gradual GBP weakness every time we hear negative news from Britain? Because it is not the direct economic effects of the Brexit that are of concern, they are already priced into the current GBP levels. The issue is whether we will be seeing a selfreinforcing GBP depreciation spiral. However, the latter cannot be forecast. It can be set off by a small trigger or can fail to appear for a long time - perhaps forever. But the fact that it has not appeared yet must not be seen as a signal that is has become impossible.”