The possibility of a “no deal” Brexit just got real last week, and it might be up to the BOE to turn frowns upside down this time. Or will Carney and his buddies signal that it’s time to brace for the worst?
BOE Super Thursday (Nov. 1, 12:00 pm GMT)
Yep, we’re in for another Super Thursday this week as the BOE will announce their policy decision, release the minutes of their MPC meeting, and also print their latest Inflation Report.
No actual monetary policy changes are expected this time, possibly in a unanimous vote to keep interest rates and asset purchases on hold since they’ve just hiked in their August statement. Besides, the U.K economy could be facing Brexit headwinds from here and policymakers are widely expected to sit on their hands until the March 2019 breakup date.
What would be interesting to see is how growth and inflation forecasts might be adjusted to account for Brexit risks. Any downgrades, particularly when it comes to business-related and trade forecasts in light of a “no deal” Brexit, could spell more doom for the pound.
Carney might also have a few remarks on contingency plans in a “no deal” situation while neither the U.K. government nor the EU seem willing to back down on their Irish border demands. Word through the grapevine is that U.K. banks are already being reminded to shore up enough liquidity in case they lose access to European markets overnight without specific agreements in place.
It doesn’t help that several WTO members don’t approve of the U.K. simply hitting Ctrl+C on its international trade agreements that it had been enjoying as part of the EU. This includes deets on tariffs and import quotas that the U.K. might need to negotiate with every single country to come up with new arrangements.
Last Week’s Price Review
The pound is the biggest loser of the week (as of 2 pm GMT), which is a repeat of last week’s disappointing performance and will also mark the third consecutive week of net losses for the pound.
And like last week, Brexit-related uncertainty is the main reason for the pound’s poor performance, although fears of a leadership challenge against British PM Theresa May also weighed on the pound during the earlier half of the week.
The pound’s trip to the downside started during Monday’s morning London session. And the apparent catalyst was this comment from Conservative Party Member Andrew Bridgen.
Conservative MP Andrew Bridgen tells LBC he expects the 48 letters needed to trigger a vote of no confidence in the Prime Minister to be in by the end of the week.
— LBC Breaking (@lbcbreaking) October 22, 2018
You see, there were rumors over the weekend that Theresa May’s leadership may be challenged during Wednesday’s Conservative Party meeting. Bridgen’s comment therefore ignited fears that Theresa May may get ousted.
Selling pressure on the pound eventually abated when Theresa May told MPs that 95% of the Brexit deal is supposedly already agreed upon.
The pound then staged a broad-based recovery on Tuesday since word began to get around that a leadership challenge may not be materializing after all.
48 letter threshold has NOT been reached yet I m told – for now
— Laura Kuenssberg (@bbclaurak) October 23, 2018
1922 Chairman Sir Graham Brady has told friends "he has no plans to go to No10 today" and is going about his normal business. Stand down folks (for now at least).
— Tom Newton Dunn (@tnewtondunn) October 23, 2018
And as icing on the cake, there was a rumor during Tuesday’s London session that E.U. will supposedly “offer British Prime Theresa May a UK-wide customs union as a way around the Irish backstop issue.”
However, the report also noted that the offer will be negotiated separately, so doubts grew that Theresa May will agree to that.
Market analysts were also saying that the market wasn’t convinced that Theresa May can successfully sell her plans to her fellow Conservative Party members, but no direct catalysts were cited.
Anyhow, the pound drifted slowly lower after that, before selling pressure intensified during Wednesday’s London session. There were no apparent catalysts, but market analyst were pointing to Brexit-related jitters and political uncertainty ahead of and during Theresa May’s meeting with Conservative Party members.
Fortunately for the pound, no leadership challenge was issued and Theresa May’s fellow Conservative MPs even showed support.
Unfortunately for the pound, that positive news only acted as a speed bump for sellers since the pound resumed its trip to the downside after trading sideways for a bit.
The catalyst for the pound’s weakness is not clear, but selling pressure did appear to ramp up after this tweet made the rounds.
Devastating @IpsosMORI chart showing changing public opinion to the question 'Are you confident Theresa May will get a good deal for Britain in negotiations with other European Union leaders?' No wonder Theresa May doesn't want a public vote on the deal. https://t.co/J7Sh52zwR9 pic.twitter.com/phlb5aHdYO
— Neil Foster (@NeilFosterGMB) October 24, 2018
At any rate, the pound eventually found support again and began trading sideways again. However, fresh sellers attacked the pound on Thursday at around 1:00 pm GMT.
There was no apparent catalyst for the pound’s slump, but some market analysts suggested that the pound may have been weakened by the Greenback’s strength.
There was also report that the BOE supposedly told banks to get their cash cushions ready to withstand a “no deal” Brexit, but that was released several hours after the pound slumped hard.
Anyhow, the pound would begin trading sideways again before finding more sellers during Friday’s London session. There were no fresh negative catalysts for the pound, but Brexit-related uncertainty was still being as a reason for the pound’s slide by market analysts.
Of course, it’s also possible that the pound is super weak this week because the lack of Brexit progress is also being put into the context of next week’s BOE statement.