Forget hard Brexit or Soft Brexit, last week’s election in the U.K. brought about the likelihood of a third path. Chaotic Brexit is now almost certain.

Negotiations are due to start in a week and the worst possible scenario for both sides has now come about.

The E.U. Chief Negotiator, Michel Barnier has been quoted as saying that continuity is the most important single matter of the smooth conclusion of a deal.

Given the average time hung Parliaments last, it is entirely possible that a complete volte-face could take place just when it gets serious.

Analysts are poring over the election results. The conclusions are muddled to say the least! We have a Prime Minister who is totally on the defensive despite winning and a Leader of the Opposition who is “Cock-a-hoop” despite the reality that even after outperforming an unpopular Government in every way still couldn’t wrest power away.

Sterling dropped, naturally, on the result but a combination of adequate liquidity and a feeling that a more accountable Government could aid the Brexit process has stabilized the pound.

The currency fell by around 2.55 initially to 1.2635 before recovering to 1.2765.

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Europe basks in political stability as Merkel says Brexit talks will begin on time

Emmanuel Macron, the French President cemented his election victory over the weekend with his party gaining a landslide in the French Parliamentary election. His La Republique En Marche Party, which was only formed a little over a year ago, is set to win 445 of the 577 seats available.

This new air of political stability will encourage Brussels in both Brexit negotiations and looking at its next reform measures.

Angela Merkel took advantage of this new air of stability to push home any advantage that had accrued. She said the she expected Brexit talks to start “on-time”, saw no obstacles and stated that the EU was ready.

The Euro rose by 2.5% on the U.K. election result reaching 0.8861, before settling back below the pivotal 0.8800 level, to reach 0.8783.

If Brexit negotiations are to start on time in a meaningful way, Theresa May is going to have to convince her more “hard-line” colleagues that she can achieve a deal that is right for Britain. The “no deal better than a bad deal” mantra is dead and was buried in the aftermath on Friday.

Interest rate decisions to dominate short term

Kristin Forbes the “prime dissenter” on the Bank of England’s Monetary Policy Committee will attend her final meeting this week before she returns to the United States and academia.

Governor Mark Carney couldn’t have predicted the utter chaos that the election result has produced for the U.K. but his reluctance to change monetary policy despite an inflation rate driving real earnings into negative territory has been vindicated.

Moves towards a loosening of the purse strings from the Government to regain popularity could become reality although the Conservative Party is, even now, seen as the Party that is most trusted with the economy.

It is likely that the Bank of England will “stand pat” on a change to interest rates. Before that happens, Carney must attend Parliament today to explain the considerable overshoot in inflation over the Government’s target. His task shouldn’t be too difficult for once.

Across the Atlantic, a third tightening of monetary policy this year is more likely. Janet Yellen has seen President Trump survive Michael Comey’s testimony and his fiscal plans are both intact and likely to pass through both Congress and the Senate.

This week’s events of note

The U.K. General Election will be the highlight of the week with the result expected in the early hours of Friday morning. The ramifications of this election stretch far longer than the next five years with Brexit and all it contains at stake.

Monday

U.K.: Inflation Hearings – Mark Carney has to defend his performance in allowing inflation to exceed the Government’s 2% target. monetary policy

Tuesday

U.K.: Producer Prices – The fall in sterling is now either losing significance or about to recommence. This months producer prices may be the single month where an improvement is seen
U.K.: Inflation – Will we see 3% if so the a rate then even the current political turmoil may need to be ignored in favour of a rate hike.

Wednesday

U.S.: Inflation – Not as significant as in the U.K. or Europe. A small fall is likely YoY on a fall in energy prices.
U.S.: Retail sales – Significant but volatile. This data is likely to already be known to the FOMC and will play a part in the interest rate decision.
U.S.: FOMC Rate decision – Long awaited decision. On balance a hike is expected but it will a close call.

Thursday

Switzerland: Rate decision – Negative rates to remain in place to discourage currency flows and therefore Swiss Franc strength.
U.K.: Rate decision – On balance, no change is likely. Kristin Forbes, the lone dissenting voice, attends her last meeting.

Friday

U.K.: Rate decision – No change, as deflation still a major concern.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”

Tags:Daily Market Brief