Pound Weakens as Early Fault Lines Appear in Brexit Negotiations – 3 May, 2017

The pound fell against the dollar amid signs that negotiations for Britain’s exit from the European Union have got off to a rocky start.

Sterling extended losses and weakened against most of its Group-of-10 peers after U.K. Prime Minister Theresa May said that “some in Brussels” do not want Brexit talks to succeed and that there were attempts to deliberately influence the results of the June 8 snap elections in Britain.

Earlier the Times reported that May has been told she will be prevented from joining discussions at future EU heads of state meetings. Brexit Secretary David Davis threatened to walk away from the bloc without a deal if provoked, while flatly rejecting a reported exit bill of as much as 100

Those reports added to the already fractious public atmosphere surrounding the talks following leaked details of a dinner meeting between May and European Commission President Jean-Claude Juncker, which alleged the latter was shocked by the Prime Minister’s approach. May said on Wednesday that the leaks were deliberately timed to influence the June 8 snap election results. Earlier in the week she’d said that Juncker is learning she can be “bloody difficult.”

“I am quite negative on the pound,” said Richard Falkenhall, a strategist at SEB AB in Stockholm. “There are several parts in the negotiations which to me seem very tricky to find solutions on. This sort of political uncertainty will continue to be reflected in sterling going forward, and on top of that you have to add the signs we have seen since the beginning of the year, where you’re seeing slower growth in the U.K.”

“What you will end up with toward the second half of the year is the situation where you have the political uncertainty having a negative impact on capital spending in the U.K. and on top of that you have growth slowdown from more cautious consumers. That sort of mix is not very positive for sterling,” Falkenhall said.

• GBP/USD falls 0.3% to 1.2895. The flat ichimoku conversion line at 1.2861 provides springboard as risks keep mounting for 1.30 breakout
  • Resistance at 1.2966-69, May 1 high, 55-week MA and support at 1.2865-61, May 2 low, ichimoku line
• Britain would have no obligation to pay a Brexit bill if it leaves the EU without an accord, Davis said on BBC Radio 4 on Wednesday. While “nobody is looking for that outcome” since the goal is to reach an agreement with the EU, “we have to maintain the alternative option” of walking away
• The U.K. currency could still show some resilience in coming weeks, according to Jordan Rochester, a foreign-exchange strategist in London at Nomura Holdings Plc
  • Sterling “has had limited drawdowns thus far,” he wrote in a client note
  • This adds “conviction to our view that the political Brexit timeline may provide ‘flashpoints’ as today’s news suggests, but the market seems to be taking them on the chin and they are largely priced in. Hence why we expect medium-term upside in GBP.”

Source: Bloomberg