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Fundamental Analysis

GBP Higher As Brexit Negotiations Officially Start Today

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Official kick-off for the Brexit negotiations

Roughly one year after the British referendum, the Brexit negotiations officially start today in Brussels. This will be a long and winding road for the UK government, particularly since the Conservative party lost its majority in the House of Commons. Against this backdrop, we expect EU negotiators to try to take advantage of the situation as Prime Minister Theresa May finds herself in a potentially weak position.

Last week, the pound sterling recovered from the massive sell-off following the loss of the Tory parliamentary majority. On Monday morning, the pound held steady against most of its peers as GBP/USD was treading water below the 1.28 threshold, while EUR/GBP eased to 0.8740.

For now, market participants have remained remarkably constructive on the pound as they prefer to see the glass as half full. However, the level of uncertainty keeps rising and we expect investors will finally realise how complicated those negotiations will become.

Mexico will follow in Fed's footsteps and raise rates

Banxico is clearly following the Fed rate. The Mexican central bank even changed its agenda in 2015 to carefully follow the Fed meetings and to maintain a rate differential to avoid any capital outflow. Tonight the institution will raise to 7%. Currency-wise, the demand for Mexican peso should continue and we should see USDMXN declining towards 17 peso for one single dollar note. The MXN is one of the best performing currencies of the year at the moment.

On top of this, the now infamous wall is far from being built and will certainly not be erected. Markets are less confident that President Trump could properly deliver his programme and this definitely adds upside pressures on the Mexican peso.

For the time being, despite the strengthening of its currency, one should not forget Mexico is still paying the price of the lack of investments in its industry sector. In particular, this is in its oil industry, which has infrastructure that is very ancient and does not enable Mexico to be competitive. Yet, pipeline constructions are booming. Domestic oil demand is also strengthening so there is room for further oil development but Mexico needs foreign investments which fell 19% in 2016.

Author: Swissquote Bank SA Website: http://en.swissquote.com/fx
Swissquote Bank SA
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