GBP: Under pressure from trade threats – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that today, GBP has been pressured by comments from President Trump that PM May’s Brexit deal could threaten a UK-US trade deal.  

Key Quotes

“Specifically Trump stated that “Right now if you look at the deal, [the UK]may not be able to trade with us. And that wouldn’t be a good thing. I don’t think they meant that.”

“In terms of total trade the EU is the UK’s largest partner. The US, however, is the UK’s largest single country trading partner.”

“Not only does importance of the US as a trading partner amplify Trump’s warning, but the fact the President is currently taking a strong stance on trade for the primary purpose of protecting US jobs underpins the tone of his message.”

“Trump’s comments on trade appear to be counter to recent indications from his administration. In October 2018, US trade representative Lighthizer stated that it intends to negotiate three separate trade deals with Japan, the EU and the UK.   He said that the talks with the UK would start “as soon as it is ready” after it leaves the EU in March 2019.   While these remarks were reassuring, concerns remain that the UK could lack political clout in negotiations after its leaves the EU.”

“The direction of GBP continues to be heavily dictated by political headlines. PM May is currently touring the country in an attempt to raise support for her Brexit plan ahead of the parliamentary vote on December 11.   Currently it appears that there is insufficient support for her deal.   Given the threat of a hard Brexit, GBP is vulnerable on the downside.”

“We see scope for a move towards EUR/GBP1.00 on a hard Brexit.   If the withdrawal agreement is passed by parliament we would expect a knee jerk positive reaction in GBP and for EUR/GBP to then settle around 0.86 as the terms on the EU/UK’s future arrangement are negotiated.”