Trading the pound increasingly means tuning into the rest of Europe.
With UK Prime Minister Theresa May having pledged to trigger the formal process for quitting the European Union by March, the cast of characters that will influence sterling just expanded. Formal talks can’t begin until Britain’s premier invokes Article 50 of the Lisbon Treaty, but in reality politicians – abroad as well as at home – are already setting out their stalls.
A preview of the impact foreign leaders can have come two weeks ago when Tomas Prouza, the Czech Republic’s top negotiator, said on September 20 that there’s “zero chance” Britain can clinch a deal with both immigration curbs and free-market access. The pound fell 0.3% to the lowest in almost a month versus the dollar. It tumbled to the weakest since 1985 on Wednesday, when May told her Conservative Party conference that “change has got to come” on immigration, which could stoke concern the UK is heading for a so-called hard Brexit with limited market access.
“There’s a lot of people to listen to, and this is why it’s becoming very difficult for investors to get any sort of lead on what the state of play is within the UK exit negotiations,” said Alex Dryden, a London-based global-markets strategist at JPMorgan Asset Management, which oversees $1.7tn.
“There are a lot of people around the negotiating table,” he said. “It’s not just the prime ministers or the leaders of those countries – it’s the influential members within the various cabinets.”
Politics is eclipsing economics as a sterling driver. The pound exceeded the three-decade low versus the dollar set in the wake of the June 23 referendum after May was reported on Tuesday to take the view that financial services would get no special favours in EU exit talks. Data showing improvements in manufacturing and construction barely dented the plunge.
Sterling set a new five-year low of 88.43 pence per euro yesterday. It also sank to $1.2686, the weakest in 31 years, before erasing the drop later in the day.
The “different voices have reminded the market that we don’t really know what Brexit will actually look like,” said Chris Chapman, a trader at Manulife Asset Management which oversees $334bn. “That’s partly the reason we’re bearish on the pound. It added another source of potential risk and volatility.”
A measure of anticipated sterling price swings around the time Article 50 will be triggered rose to the highest since July.
What makes European politics particularly tough for traders sitting in London is that the subject is wide, varied – and littered with pitfalls. While Portugal and Italy face potential constitutional crises, eastern European countries such as Hungary are more concerned with preventing the quotas of migrants from Syria and elsewhere in the Middle East and Africa that the EU is trying to impose.
Any Brexit deal must be unanimously approved by all 27 of the remaining EU governments, with each having veto rights.
A divorce also needs to be approved by a qualified majority in the Council of Ministers, which means 72% of member states covering 65% of the population. Even tougher to achieve is an endorsement of the new post-Brexit trading relationship, which will require unanimity in the council as well as a majority of the European parliament and votes in national capitals.
And with Malta and Estonia due to hold the rotating EU presidency next year, countries that many investors would regard as minnows will be able to shape the agenda, and influence the pound. The widening cast of players recalls the Greek debt crisis of 2009, when investors in the country had to follow International Monetary Fund officials and domestic parliamentarians.
Not everyone’s convinced sterling will move as European politicians increasingly enter the fray. To Neil Dwane, a global strategist at Allianz Global Investors Capital, it’s all about how big the name is.
“The day-to-day moves get, to some extent, over-emphasised and for many long-term investors they are noise rather than signals,” said Dwane, whose company oversees $525bn. If German Chancellor Angela Merkel speaks, “the markets will listen very carefully. If the guy from the Czech Republic says something, I would’ve ignored it completely.”