Politics and the Pound
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Transcript of Politics and the Pound
Politics and the Pound –A
World First Webinar
Jeremy Cook
Chief Economist and
Head of Currency Strategy
• A New PM
• ‘Brexit means Brexit’
• Single Market vs Immigration
• Eyes in Europe
• Division of Labour
• The timeline of politics
• Hammond to the fore
• Implications for the pound
Westminster and The City
• Theresa May as Prime Minister has reduced political uncertainty in the UK and in the wider
Europe, but signs of pronounced economic weakness may shorten any honeymoon or
market driven goodwill.
Source: Bloomberg
• Hard to imagine more testing circumstances for an incoming leader to face. Mrs May will
need to unite a deeply divided country following the vote to leave the EU, bring
together the opposing sides of the Conservative party and fulfil the task of actually
taking the UK out of the EU and negotiating a strong deal for the country. On top of this,
she has begun to set out the makings of a reforming policy programme, with proposed
changes to corporate governance indicating a different attitude to big business and ‘The
City’ than that of her predecessor.
• A 2nd referendum has been ruled out as has a near-term General Election
• Has limited Brexit fallout within her own party and quelled Scottish voices however her
Cabinet appointments have raised eyebrows.
• Pressure to invoke Article 50 of the Lisbon Treaty is increasing on a day-by-day basis but
we do not think that it will take place this year.
• Her appointment of Messrs Johnson, Davis and Fox as Secretaries of Brexit facing
departments is being seen as clever and insulates her Premiership.
• Canada has summed up the trade mood with Canada's International Trade Ministry
releasing a statement saying that their first priority was to ratify the Canada-EU
Comprehensive Economic and Trade Agreement. That was a clear sign that, despite the
optimism, experts still warn any trade deal will take years to complete.
Source: Citibank
• This is the unsquareable circle and has been brought up countless times by European
leaders (Hollande, Merkel, Renzi and von Rompuy)
• Secretary for Brexit David Davis believes that the EU will allow Britain a good deal, despite
repeated warnings from senior EU figures. 'The ideal outcome, (and in my view the most
likely, after a lot of wrangling) is continued tariff-free access. Once the European nations
realise that we are not going to budge on control of our borders, they will want to talk, in
their own interest,' he said.
• The Theresa May Government is yet even to fully guarantee existing EU citizens rights,
nor the fate of those who move to Britain before an exit deal is finalised. Theresa May has
also made her more restrictive views on immigration clear which has rankled those on the
continent.
• Procrastination is seen as hurting the UK not just economically but also politically, as the
EU legislative machine will rumble on without UK input. So far the EU has always been
careful to keep the UK involved in discussions over new legislation, particularly when it
comes to financial markets. Not anymore.
• Britain will indeed exit the EU. No one sees any realistic possibility of the decision being
reversed. Apparently, few think the UK will move to join the EEA (the Norwegian Option),
which might be the best solution economically but does not allow for border controls and tis
therefore politically inviable
• We think that a UK-specific solution will have to be negotiated where limiting EU
immigration would come at the price of compromised access to the single market.
• Europe is of course on holiday for a month now so the conversation will calm for now
however terrorism attacks will not help anti-migration pressures.
• Jeremy Corbyn, current Labour Party leader,
will face a challenge from Owen Smith MP.
• The election is due to occur during the
summer, with the winner to be announced on
24 September, just prior to the Labour Party
Annual Conference
• Recent polling by YouGov puts Corbyn
ahead of Smith at 56% with Labour Party
members (18 July). Furthermore, Labour
Party membership continues to rise: 3,000
pro-Corbyn members joined the week
commencing 11 July, according to The
Independent, on top of the c.183,000 who
joined in the 48 hours to 21 July.
• Rather ineffectual opposition to the
Conservative party may allow for additional
strength within parliament.
The timeline of politics
June 2016 Q3-Q4 2016 2017 2018
23 June: UK referendum
result announced in
Manchester Town Hall
24 June: Likely resignation
of Cameron, triggering
leadership contest
24 June (or shortly
afterwards): UK formally
make request to withdraw
from EU and trigger article
50 provisions
Q3: Domestic Conservative
party leadership contest/new
PM to take office
Q3/Q4: UK and EU to
establish working
method/process and
indicative timetable for
“divorce settlement”
2017: Renewed pressure for
Scotland and N Ireland to
hold referendums on
Independence / EU
membership
Q3/Q4: Formal end of two year
Article 50 Process. UK to
formally cease EU membership
unless extension agreed by
agreement of all EU leaders.
Process of disengagement from EU including amendments to national law 2026?
• Looking for the ‘Reset’ button
• We expect a recession in the second half of the year and
only a gradual recovery that will be pockmarked with lower
employment and increases borrowing.
• We expect that Hammond and the Treasury will announce
a slew of new measures in the November Autumn
Statement. Likely policies to drive consumption and
increase investment although we do not expect a splurge.
• Housing market could easily be supported via cuts to stamp
duty and/or increased help for Help to Buy.
• Difficult to see a world within which the pound has hit its bottom. Obvious risks remain to
all forecasts with political risk increasing in the US as we close in on the Presidential
Election.
• We like to think of the future for sterling as a series of shoe drops, alternating political and
economic pressures. The first political shoe to drop was the Brexit vote, the first economic
shoe to drop is upcoming economic data and the reaction of the Bank of England,
• We then follow with political news in the form of viability studies on certain negotiations and
then likely doubts over our ability to rebound economically.
• It is our opinion that there is currently 6-7% more for GBP to fall in most crosses contingent
on recession, stimulus and political risk elsewhere.
Source: Bloomberg
Source: Bloomberg
Questions
• These comments are the views and opinions of the author and should not be construed as advice. You
should act using your own information and judgment.
• Whilst information has been obtained from and is based upon multiple sources the author believes to
be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
• All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are
subject to change without notice.
• Any rates given are ‘interbank’ i.e. for amounts of £5million or more thus are not indicative of the rates
offered by World First.
Disclaimers