Buy GBP on Brexit bill
In an important step forward for Brexit, Britain formally acknowledged that there will be a cost to separation from the EU. The media is framing the existing financial obligations as a “bill” which clearly has a punitive and negative connotation. However, owning up to commitments it’s the logical and legal action that must occur. The GBP rallied on the news against the USD and EUR. The development is bullish in our view as the glimmer of honestly (in a sea of cloudy Brexit rhetoric) sets up a constructive dialog at next week negotiations. In addition, that acknowledgement of existing and future liability highlight the complexity of executing a “hard” Brexit.
If nothing less a “soft” Brexit will been a necessary for the UK in order to monitor capital allocations and usage. Foreign Minister Boris Johnson has stated that EU must avoid insisting on “extortionate sums.” For the long game we suspect cooler heads will prevail in UK-EU relations proving GBP room for further appreciations. However, our ideal strategy around the sterling remains buy on panic Brexit selling. We are long the bullish reversal off 1.2831 pivot targeting 1.3048 resistance.
Balancing Act at the ECB
At next Thursday’s meeting of the ECB’s Governing Council (20 July), we expect the Governors to continue their monetary tightening, but to do so in a ‘kind and gentle’ way. That is, they will try to soften the blow so as not to roil markets more than necessary.
Next Thursday, we expect ECB Chairman Mario Draghi to act hawkish while trying not to sound hawkish. We believe he will begin plans for a tapering of Quantitative Easing to start on 26 October. We expect QE to end in mid-2018 (depending on market reaction and economic data), and we look for an ECB rate increase by the end of 2018.
Central banks worldwide are shifting toward normalization of interest rates, and this is sending shockwaves through financial markets, pushing yields up 25bp across the yield curve. Draghi recently smashed conventional (dovish) wisdom with hawkish comments, sending the EUR on a bullish tear. He seems inspired by the Eurozone’s solid growth and not too fearful of inflation.
