Good morning,

Brexit begins next week

So now we know. A child conceived on June 23rd will be born on March 29th and be given the name Brexit. The stopwatch that will count down for 2 years will begin next Wednesday. Britain, unless an extension deal is ratified by all 27 member states will leave the EU on March 29th 2019, a date that coincides with my 35th birthday; I can imagine the bar bill that night will be a sight to see.
Sterling hardly reacted to the news; we’ve known for months now that Article 50 would be triggered by the end of March and that should indeed come to pass given the news from Downing St yesterday. The issue is that once the ‘knowns’ – Brexit bill being voted on, Article 50 being triggered – are done and dealt with sterling is by definition back into a period of uncertainty around the negotiations.

Reports that the negotiations may not start until June – once electoral risk in France has calmed down – are not good news for the pound; the stopwatch on 2 years of negotiation begins when Article 50 is triggered not when we finally sit down to talk. Time is not on the UK’s side in the negotiation stage.

The EU announced yesterday that it was ready to start the negotiations whenever. If the UK get quick wins or progress on significant sticking points – financial services regulation, rights of EU nationals already here and access to the single market – then sterling could easily make some brisk gains.

As if by serendipity itself our webinar on what we expect for the UK and the pound once Article 50 has been triggered is taking place next Wednesday afternoon. Sterling comes into these negotiations weak, as the data that had looked so healthy six months ago now looks rather pallid. Is this the beginning of another deep leg lower for the pound and how low could it possibly fall? What does this all mean for your business? On March 29th we will try to answer these questions and take a deeper look at where the risks to your business lie in these markets.

You can register, for free, here.

UK inflation crucial at 09.30

For now sterling seems quiet but today’s inflation data, due at 09.30, will likely increase volatility on the session. Anything above 2% will be the first above target reading for UK inflation since November 2013 and our focus on the impact on the consumer will be determined by just how positive the real wage story remains.

Businesses have passed on some of these costs to consumers but some of these costs have also been taken into margins. Those in the retail sector especially who are dealing in razor thin margins already will likely be the first industry to show job losses courtesy of the devalued pound’s effects.

Given the belief that the Bank of England is unlikely to raise rates unless inflation gets way out of line with expectations we do not foresee substantive gains for sterling from this announcement. Anything above 2.3% may be able to scare the doves a little bit but we think it unlikely it will get that high.

Euro rallies as debate seen as a draw
Depending on who you listen to there were 3 or 4 winners from the 5 candidates within the French Presidential debate that took place last night. Some will say that Fillon won for looking calm and presidential while attempting to gloss over recent financial indiscretions. Some will say Macron won as he managed to land a few blows on Marine Le Pen without being laid low by anyone else and some will say Le Pen triumphed as she fought off every other candidate to tell the French what is really going on.

The polls are unlikely to have shifted much but the euro has rallied through the Asian session.

The Day Ahead

Away from the slew of inflation numbers from the UK the data calendar is quiet and the political calendar looks benign too although further headlines over the FBI’s investigation of the Trump campaign’s ties to Russia could easily kick up some dollar weakness ahead of the crucial healthcare vote on Thursday evening.

Have a great day

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