Populism strikes again.
You might recall my extensive coverage of the pound’s trials, travails, and triumphs which unfolded last month as PM Theresa May attempted to pacify market jitters about just what Brexit would mean for the UK economy.
As a refresher, here are a few notable posts on the subject:
- Thanks Populism: Brexit May Make British Pound “Irrelevant”
- Anatomy Of A Flash Crashing Black Swan
- A “Clean And Hard” Pounding: Complete Recap Of Pound’s Rough Day
- Pound Plunges On Brexit Fears
- Sterling Spikes As May Delivers Brexit Speech
Well on Thursday we got a veritable “double pounding” as sterling was forced to sort out a (maybe hawkish, maybe dovish) BOE decision and the release of the infamous “Brexit white paper” that outlines the UK’s road to the dustbin of history. Here are highlights from the BOE meeting (hint: it’s that first bullet that should matter, even though the market apparently read things differently):
- Bank of England reiterates that it has limited tolerance to above-target CPI, and some Monetary Policy Committee members had “moved closer to those limits.”
- Keeps key interest rate at 0.25%, gilt purchase program at GBP435b, corporate-bond plan at GBP10b
- MPC voted 9-0 on all 3 decisions
- BOE raises growth forecasts, keeps inflation forecasts broadly unchanged
- Says current policy stance “depended on the trade-off between above-target inflation and slack in the economy”
- Reiterates that “monetary policy could respond, in either direction, to changes in the economic outlook as they unfolded”
And here’s Goldman’s take:
Overall, today’s communications were quite neutral. In our view, the GDP growth forecasts leave room for the Committee to be surprised to the downside this year. We continue to believe the next change in policy will be an easing towards the end of the year, via additional asset purchases.
The Minutes signal some increased divergence in views across Committee members. In particular, “for some members, the risks around the trade-off meant that they had moved a little closer to those limits”.This suggests that, in addition to the evolution of the data, differences in views across Committee members on the acceptable trade-off between slack in the economy and above-target inflation will influence the pattern of voting. A minority of Committee members are closer to voting for a rate rise based on these latest forecasts.
Ok, so you would have thought that might be the controlling factor for GBPUSD on Thursday, but it most assuredly was not. First of all, the exceedingly brief spike in cable was met with supply from short-term accounts, traders said.
But the real problem for sterling is the fact that Brexit is becoming real, as outlined in the government’s white paper (a kind of blueprint for the country’s break with the EU) released Thursday, a day after Parliament gave May the authority to trigger Article 50.
I’m not going to bore you with the details, but here, courtesy of the Guardian, is a summary of the bit about an “orderly” exit:
The white paper says the government aims to deliver “a smooth, mutually beneficial exit” but says this will require “a coherent and coordinated approach on both sides”. Article 50 will be triggered no later than the end of March, it repeats.
It acknowledges it is “in no one’s interests for there to be a cliff-edge for business or a threat to stability”, saying the government would like “to have reached an agreement about our future partnership” by the end of the article 50 process and repeating May’s suggestion of variable “phased processes of implementation” to give everyone time to plan and prepare for the new arrangements.
The paper also reiterates the prime minister’s remarks that “no deal for the UK is better than a bad deal for the UK” — and suggests that, to mitigate against the impact of not getting the deal it wants from the EU, the government will prepare legislation “to ensure our economic and other functions can continue”.
It does not say what the legislation will contain, or what future economic model the government might envisage.
As I noted last month on any number of occasions, you can talk all you want about how the world needs a clean break with the established order and how populism and nationalism will represent a return to some bygone era of pride and prosperity, but the market f*cking hates it. Every single last bit of it. Here, just look:
A subtle message to the UK: don’t say you weren’t warned…