- Trump victory is called “psychological boost” for the UK’s Brexit negotiations
- Bond sell-off opens up emerging market trading opportunities.
Cable continues to gain strength as markets reassess their assumptions about the UK’s prospects in the run up to its formal departure from the European Union.The British Pound hit a five-week high versus the US Dollar earlier this morning, buoyed by expectations that Donald Trump’s unexpected election triumph will produce a US administration that sympathizes with its Brexit decision.
The President-elect has emphasised that the US and the UK will continue to enjoy a “very special” relationship. Trump trade adviser Dan DiMicco has claimed the UK would get priority status as America's "friend" and was leaving the EU for good reasons. That’s in contrast to President Obama, who famously said that Brexit would see Britain go to the "back of the queue" for trade deals with the US.
Former UK Chancellor Norman Lamont this morning said Trump’s victory is a “psychological boost” for the UK’s Brexit negotiations. Put in context of recent legal developments, it appears that the likelihood of a “hard Brexit” are diminishing by the day.
Chart 1: GBP/USD Hourly Chart (November 2 to November 11)
GBP/USD currently is trading back near its pre-flash crash levels at $1.2656, after reaching a high of $1.2675 earlier this morning. That’s even more expressive considering that the US Dollar is also continuing to strengthen on the reassessment of what a Trump presidency means for the US economy; namely increased fiscal stimulus and lower taxes, thus boosting inflation expectations. This is the “Trump reflation trade” in action.Markets have held onto their rate expectations pricing as a result of the impending shift in fiscal policy, with Fed funds futures pricing in a near 80% likelihood of a rate hike in December.
Chart 2: EUR/GBP Hourly Chart (November 2 to November 11)
Sterling strength is more apparent in the EUR/GBP pair, which has fallen below £0.8700 for the first time since late-September as markets become increasingly concerned that the Euro area will be the next hit by another populist backlash, which will reap pressure on the single currency. The Italian constitutional referendum will take place on December 4 and there are elections in France and Germany next year.
…But There’s Still Plenty of UK Political Uncertainty Afoot
However, there may me more volatility to come in Sterling trading. Trump may have emboldened the Brexiteers, but Brexit is still not a done deal.
Last week, Britain's High Court ruled that Parliament must vote on the triggering of Article 50, the process that begins Britain's formal exit from the EU. This coulddelay, or even altogether scupper Prime Minister Theresa May’s plan to trigger Article 50 by the end of March 2017. The High Court says it will hear the government’s appeal against its ruling last week between December 5 and December 8. Expect this period to put pressure on the British Pound.
The BBC reports today that some MPs are planning to vote against triggering Brexit, with the Conservative government complaining that Liberal Democrat and Labour MPs are "trying to thwart and reverse the referendum result.”
--- Written by Oliver Morrison, DailyFX Research