With the ever present Brexit talk casting doubt over the future of the UK for the past 3yrs, it looks as if we’re finally set to find some closure, maybe. The UK passed it Brexit bill earlier this month through the House of Commons and the House of Lords, and set Jan 31 as the official day when the UK parts ways with the EU for good. Following the official Brexit date, the UK and the EU may then begin negotiations on trade and other various economic and logistical issues involved in the split. As we wade through a year’s worth of negotiations between the two sides, it has our attention turned to the British Pound.
The Big Picture
My analysis suggests that the British Pound could outperform this year with more clarity surrounding the future of the UK. Boris Johnson has largely been regarded as a “Pro Business” PM, and will attempt to harbor foreign investment back into the UK, which has largely been scarce since the onset of Brexit and the uncertainty surrounding the future of the UK’s economy. More outside investment, creates more demand for that host countries currency, in this case the British Sterling.
The Near-term View
With a broad based economic slowdown across the European region for the past 1-2yrs, including the UK, we’re beginning to find a light at the end of the tunnel, we think. Specifically in the UK, with further clarity regarding Brexit, a recent health Employment report (208K jobs added in the UK last quarter), and an acceleration of the UK PMI data released this morning (not strong by any stretch, BUT an acceleration indeed) – We’ll now turn our attention to the Band of England and there decision on monetary policy on Jan 30th . Prior to the PMI data released, consensus put a 60% chance of a rate cut by the BOE at this month’s meeting. I’m less convinced, and expect the BOE to take a “wait and see” approach. It’s very close. Going forward, we do expect a modest acceleration in the UK economy and certainly having the uncertainties surround Brexit nearing the rear-view mirror, we think the British Pound will outperform going forward.
Near-term Bullish trade (1-3 weeks) and trend (3-6 month time frame) – Favorable Entry Level 1.3060. A break of 1.2780 will tip the 3-6 month trend and we’ll have to re-check our premise at that point.