Despite a more upbeat tone from the Bank of England, the Pound continues to dive in the early stages of Q1 with very little to support it. A weaker Pound has helped the UK’s export industries, as witnessed this week with both Manufacturing and Industrial production, but this alone has not bolstered the position of Pound Sterling, with further signs pointing to further falls in the coming weeks.
The driving factor behind Sterling’s decline does not appear to be concerns for the economy, Bank of England’s Mark Carney has openly expressed that the UK economy is beating projections which could lead to a revision of the Central Bank’s forecasts. Carney has even expressed that a hard Brexit – a complete removal from the customs union, would impact the Eurozone more than the UK.
But none of this appears to matter to investors, for one, no Brexit plan has ever been formally announced which makes the current economic outlook a mere fluke. Furthermore the UK faces the biggest challenge in the weeks ahead, when Theresa May is set to invoke Article 50 and begin the process of leaving the EU.
It’s not Brexit that is a concern amongst markets, but the type of Brexit that the UK pursuits. There have been a number of hints recently that point to the Government lowering immigration as a core strategy, and for this leaving the single market entirely would be the only way of achieving this.
Theresa May to announce Brexit strategy on Tuesday
Next Tuesday will be a huge day for financial markets, as the PM gives her Brexit speech, outlining her strategy for exiting the EU. Markets will be watching with scrutiny to understand what type of Brexit the UK faces, and could have significant implications for the Pound.
Any hints towards a hard Brexit could see the Pound tumble to the lows witnessed in October, whilst a soft Brexit or transitional Brexit may boost the Pound.
Markets have already adjusted to her New Year speech, and remain weary that her terms require a hard Brexit to action. In order to curb immigration and leave the ECJ (European Court of Justice), the UK would have to leave the customs union in order to distance itself from the four EU principals, of which one of them is free movement of people.
As it currently stands the Pound could face new challenges early next week, lending its way to higher consumer prices as a result of a weaker Sterling.