Pound extends rebound as May s pro EU talk boosts GBP

Who said the pound was moving on fundamentals this week? Oh, yes, that was us. We were wrong, the pound is back moving on political headlines. GBPUSD has nearly retraced yesterday’s entire steep sell off when it dipped to 1.2080. The driver appears to be a secret recording of PM Theresa May sounding decidedly pro-Remain back in May when she was giving a talk to Goldman Sachs. She sounded concerned at the prospect of businesses leaving the EU in the event of a vote to Leave, and even sounded supportive of the UK remaining in the single market. This is at odds with her recent comments, which appeared to sacrifice the UK’s membership of the single market in return for complete control over EU immigration.

The pound relies on the Private PM

We have mentioned before that there is likely to be a public Theresa and a private one, and the private Theresa could be less “hard” Brexit than she let on at the Tory Party conference. The more focus there is on the private views of Theresa May the more likely this is to soothe the battered pound. We continue to think that the worst of the selling pressure is over for the pound, bar another negative political shock, and we could see the currency trade in a relatively wide range until the end of the year between 1.20-1.25.

Should I stay or should I go, Mark Carney just doesn’t know…

The biggest negative shock for UK assets would be a decision by BOE Governor Mark Carney to resign his position in 2018, rather than stay on until 2021. He gave nothing away when he testified to the House of Lords Economic Committee on Tuesday. However, he cited the decision would be based on personal reasons, which could make it tricky for him to stay on, so we would not be surprised if he does resign his post early, which could be bad for the pound at the end of this year. On a brighter note, he said it was too early to predict the future of the UK’s relationship with the EU at this stage, and the markets, which are prone to drama at the best of times, could be too gloomy about the post EU prospects for the UK economy. He also appeared to rule out further near term rate cuts, this has helped UK Gilt yields to recover and the 10-year yield is now above 1.10%, which is supporting the pound recovery for now.

Can Dr Fox deliver the medicine for the markets?

Ahead there could be another dose of UK politics for traders to contend with. Liam Fox, who is charged with managing the UK’s trade deals post the EU split, is testifying to the Commons Committee on the impact of the collapse of the Canadian-EU trade deal, and what that means for the UK’s prospects of striking a deal with the EU after Brexit. Expect tough questions for Mr Fox, if he fails to deliver a solid performance and a clear trade policy for the UK, then we could see the pound tumble back to yesterday’s lows below 1.21.

The FTSE 100 is also under pressure today, and is back below 7,000. It is being led lower by the energy sector, which is down more than 1.6%. This is partly due to the fall in the oil price, which could come under sustained pressure if Opec decides to scrap its planned production cut at its meeting next week. Russia and Iraq have both said they don’t want to participate in a production cut, which could put downward pressure on the oil price going forward. Energy makes up more than 14% of the UK index, so when the oil price is weak it can have a material impact on the FTSE 100.

Stocks could suffer alongside the pound

Overall, the market will be looking to Westminster to determine the next move for the pound. If Mr Fox can deliver a winning performance today, then we could see an extension to the pound’s rally, potentially back towards 1.2350 – last week’s high. However, delivering a sound Brexit strategy has not been the government’s strong point in recent weeks, so if Liam Fox fails to deliver later today then the pound could come under pressure alongside UK stocks, as a declining currency is considered a sign of low confidence in the potential for the UK economy post Brexit.