Sterling’s 2.75% rally today is the biggest advance in more than eight years. The UK government has done a good job of managing expectations. Over the last week or so, Prime Minister May and Chancellor of the Exchequer Hammond have made it clear that the intention was a “clean break” from the EU. There is an implicit threat by both officials not to see a punitive agreement.
May wants to remold the relationship with the EU maintaining tariff free trade, but not having to impose the same duties on non-EU countries. This would allow the UK to have free-trade agreements with other countries, such as the US. She seeks a transitional arrangement for financial services and “other companies” to allow the new rules to be phased in gradually.
The UK Prime Minister said she was prepared to walk away if Europe balked or sought to punish the UK. While it seems no one wins with a messy divorce, at the same time, the bar to exit should not be low. It is also not clear that the current parliament would support “walking away.” Once Article 50 is triggered, the balance of power shifts to the EU.
Sterling gapped lower yesterday following Hammond’s interview that outlined the government’s stance. Today with Trump’s comments (on dollar and border adjustment) and the broad dollar decline, sterling would have likely recovered in any event. With May, the market bought the fact as it has sold the rumor.
This chart, made on Bloomberg, shows the trendline drawn off sterling’s early September high and the early and mid-December highs. That trendline is found near $1.2490 today but falls toward $1.2460 by the end of the week. The $1.2430 area was the high here in January, and the $1.2450 area coincides with the 38.2% retracement objective of the decline since that early September high. The $1.2380 area, which was surpassed today as sterling approached $1.24, corresponds to a 50% retracement of the down move since the December 6 high near $1.2775.
The upper Bollinger Band (two standard deviations on top of the 20-day moving average) is found near $1.2430 today too. The 50-day moving average is just above $1.2410 and the 100-day moving average is found near $1.2565.