Where Next for Pound Sterling Following P.M.'s Defiant "Impasse" Speech

Above: U.K. Prime Minister Theresa May. "Hell hath no fury like a PM scorned" says one analyst in response to today's briefing. Image (C) Pound Sterling Live.

Pound Sterling slumped from two-month highs against the Euro and U.S. Dollar ahead of the weekend after U.K. Prime Minister Theresa May came out swinging against her E.U. counterparts who she accused of failing to negotiate Brexit in good faith.

The U.K. currency ended the week at 1.1139 against the Euro and 1.3084 against the U.S. Dollar in what proved to be the biggest one-day decline of 2018 for the latter.

May delivered an extraordinary briefing on the state of play of negotiations and confirmed an impasse had been reached as the E.U. were refusing to negotiate in good faith. (See full text).

May's suggestion that an impasse in the talks had been reached, and a convincing reiteration that "no deal is better than a bad deal", left markets believing the odds of a 'no deal' Brexit had risen substantially.

"It’s the first time she has said ‘no deal is better than a bad deal’ and actually believed it," comments a certain Nigel Farage.

Certainly, the markets are believing her too.

The Pound-to-Euro exchange rate is recorded as being 1.26% lower on the day at 1.1126 at the time of writing; the Pound-to-Dollar exchange rate is 1.50% lower at 1.3070. Sterling is in the red against all major currencies.

The reactions to May's statement are coming in, here are what foreign exchange strategists, economists and senior business figures are saying:

Adrian Paul, foreign exchange strategist with Goldman Sachs:

"The political environment at Westminster is fraught, and a breakdown of negotiations cannot be ruled out."

"If it were to happen, our FX strategists argue that a combination of heightened uncertainty and prospective adjustment could precipitate a 10% nominal Sterling depreciation in the first six months."

Thomas Pugh, UK Economist at Capital Economics:

"Theresa May’s combative comments in a surprise press conference indicated that the chances of a 'no deal' scenario have risen, causing the largest one-day fall in the Pound in eleven months. Indeed, the two sides remain far apart, meaning that the chances of an agreement being reached in October and finalised in November seem pretty slim."

Natixis Research:

"An exit from the E.U. without agreement would be clearly negative for the GBP

"A last-minute deal would result in a GBP rebound early 2019. In this context the EUR/GBP should reach 0.90 or 0.91 to 3 months before returning to the level of 0.89."

Viraj Patel, currency strategist at ING:

"‘Impasse’: We’ll hear more of this ahead of Tory party conference. Irish border concessions weren’t expected till after. Brave to buy the GBP dip... but long game is one of greater upside than downside if a deal is ultimately reached. Volatile GBP is one thing we can be sure of."

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Hamish Muress, currency analyst at OFX:

“The rhetoric that ‘no deal is better than a bad deal’ is startling, and undermines recent hopes that a deal could be finalised soon. If neither side makes any concessions, more uncertainty and further sterling losses will follow. The Euro has also lost ground against the US Dollar, indicating that this current impasse helps neither the UK nor the EU.”

Miles Ward, Currency Portfolio Manager at State Street Global Advisors:

“Defiant speech from the Prime Minister, effectively withdraws from negotiations until the EU give a detailed explanations and suggest alternatives to the Chequers deal.

"Anecdotally we are hearing that there is more interest in downside GBP protection from banks. Agreeing on deal is just the start before the potential for more GBP volatility as we look to get any deal ratified through parliament.

"The next key negotiation event is the October European Council summit which now has a higher risk of a no deal due to the lack of progress; we could also see Tory MP’s give PM May a tougher time at the Conservative party conference with increased risks of a leadership challenge. We remain short term neutral on GBP/USD.”

???????? $GBP sell off after PM Theresa May's speech. Markets fear a no deal #Brexit. Don't expect much progress in negotiations before we get closer to the deadline in Q4 (Nov-Dec?) $EURGBP pic.twitter.com/Kz7Cz2fLBX

— Danske Bank Research (@Danske_Research) September 21, 2018

Carolyn Fairbairn, CBI Director-General:

“The events of the last 24 hours have made one thing abundantly clear - negotiators on both sides must change tack. Rejection of Chequers helps nobody.

"The stakes could not be higher. Jobs, wages and living standards are at risk, on both sides of the Channel.

"With time slipping away, employers and employees alike need to see constructive dialogue. Pragmatism must come before politics. Every day lost in rhetoric is lost investment and lost jobs."

Samuel Tombs, Pantheon Macroeconomics:

"The PM's rhetoric is designed to get her through the party conference. As in the past, she will inevitably fold at the last minute. In fact, it's in her interest to string out the negotiations, leaving MPs little choice but to sign off her (the EU's) deal just before A50 deadline."

David Lamb, head of dealing at Fexco Corporate Payments:

"Hell hath no fury like a PM scorned.

“Theresa May’s response to the reality check she received at the hands of EU leaders in Salzburg was terse but determined.

“Mrs May clearly feels bruised by what she sees as the EU’s lack of respect for Britain’s position.

"But even filtering out the bits of her retort that played to British voters rather than EU negotiators, her message to Brussels was clear: the UK will crash out of the European club if the only deal available is one Mrs May deems a bad one.

“Such fighting talk goes beyond a mere ‘impasse’. Diplomatic battle lines have been drawn, and with barely two months of negotiations left, the currency markets are busy recalibrating the risk of a no-deal Brexit.

“As the likelihood of a Brexit cliff edge notches up, so too does Sterling volatility – and the Pound is closing a rollercoaster week on a downward trajectory against both the Euro and the Dollar.”

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Lock in Sterling's September recovery before it disappears: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here