Theresa May wants a hard Brexit, and that’s what she’ll get. But what does the pound say?
The British prime minister earned a 522 to 13 victory in parliament to hold elections on June 8th. Because May is expected to earn a decisive victory, this seems to gives more political stability to the Brexit negotiations.
Markets liked the news, as the British pound moved above its 200 day moving average for just the fourth time since October 2015.
Currencies are usually a great indicator. Until they’re not.
But will it last? There are a few trends that would seem to contradict this move by currency traders.
First, inflation is still running hot in the U.K. This ordinarily wouldn’t be a big deal: the Bank of England has been trying to stoke inflation to jump-start the economy. The bank cut rates to 0.25% in August, and hasn’t moved since. But when the inflation is paired with real wage growth falling near 0%, things start to look different.
Second, there is still a lot of political uncertainty, even if May wins. What happens with Scotland? What does the Bank of England or parliament do if wages turn negative? What kind of deal will May get? There’s a case to be made that May could get a worse deal, because there isn’t an opposition party to try to craft new provisions, and general elections won’t happen until 2022. The E.U. would have no reason to walk softly because they see an opportunity for better terms in the near future.
The currency markets are usually the best indicator of the economic and political underpinnings of a country. But remember, the pound spiked on the day of the Brexit vote, before results were counted. This could be another rare moment when cable is not telling the whole story.
Photo: Number 10, Flickr Commons