Pricing elasticity stretched to the limit
There is little tangible that can be put forward as the reason for the rise in the value of sterling almost in one direction since the agreement of the EU Summit on December 12th to move Brexit talks to stage two. The transition talks will apparently start later this month with the trade discussions slated for the end of March.
Looking back to last summer and autumn, there is a clear correlation between periods when negotiators on either side were making comments to when there were 'consultations' taking place. This leads to the conclusion that since there have been no significant comments since the December summit, sterling would rise.
Given the contrast between both the current position and outlook for the UK versus the U.S, economies, there is also little reason for sterling to rally. The interest rate differential between the dollar and pound is likely to widen despite yesterday’s comments from arch MPC hawk Michael Saunders. Saunders comments that rates were likely to rise gradually over an extended period were nothing new but were about as hawkish as he could be in the current environment.
EU stance as tough as ever
Despite hopes to the contrary, there has been nothing tangible from the EU to suggest that their stance over Brexit is softening at all. It seems that the newswires are being scattered with comments that draw the response “well, he would say that”. The chief architects of the EU stance, Donald Tusk and Jean-Claude Juncker, both commented yesterday that the UK could stay within the EU if it were to reverse its Brexit vote. It cannot possibly be clearer that that isn't going to happen. Even Nigel Farage has had his say on that topic.
The nonsense over some pact between Span and the Netherlands over making sure that the UK remains close to the EU post-Brexit is so much hot air.
Even the technicals favour a correction or reversal
Part of sterling’s rally has been due to several technical levels being broken that have led to stop losses on some extremely long-term trades being hit. There is going to be strong resistance at 1.4036 which is the 68% retracement of the high to low fall in sterling post-referendum. Unless there is a significant macroeconomic or political development, that should be the top of the rally on this move higher.