“Fasten Your Seat Belts” Or, Prepare For A “Pound”ing

So what did we learn on Saturday evening?

Well, we learned that next Friday’s circus in Washington won’t be the only thing to trade off of in the week ahead. On Tuesday, UK PM Theresa May is expected to detail her plans for a “hard Brexit” during a speech at London’s Lancaster House.

Apparently, keeping out the “terrorists” is more important than economic stability, which is why May is reportedly prepared to signal a clean break with the EU. Of course it’s not that black and white. It’s not as though triggering Article 50 is some kind of cure-all when it comes to border security and public safety. And therein lies the rub: while it’s not clear what effect Brexit will have on security, it is abundantly clear what effect it will have on the economy. You’d think May would take that into consideration.

In any event, the immediate focus is on how May’s speech will affect the pound. As noted earlier this morning, it’s likely to be a painful week.

Here with a bit more color and context on how sterling usually reacts to the PM’s speeches is Barclays:

GBP: Fasten your seat belts. On Tuesday, Theresa May will make a speech on her approach to Brexit. In the past, sterling has reacted positively only twice to May’s speeches on Brexit: her very first speech on July 11, and in mid-November when she stressed the benefits of Trump’s presidency for Brexit in Lord Mayor’s banquet speech (Figure 7). While we think more clarity about the government’s negotiating stance will bring about support for sterling, the market has consistently added net short positions when exit from the single market was considered. Any reassuring comments on the importance of safeguarding business and trade will be GBP positive, while any “hard Brexit” rhetoric could induce further downside risks to the currency, in our view. The Supreme Court could be ruling on Article 50 this week. A ruling for an active role of the UK parliament in triggering Article 50 is already largely priced in sterling, in our view. However, there is a low but non-zero probability that the Supreme Court could force the government to secure approval not only from the UK parliament but also from devolved institutions to trigger Article 50 (Scotland, Northern Ireland). Such an outcome would likely delay Brexit and drive a rebound in GBP.

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