While UK Prime Minister May’s cancellation of the Brexit deal vote in Parliament has grabbed the headlines and punched sterling for steep losses, this by no means provides further visibility on sterling. Elsewhere, the game changer yesterday was French president Macron caving to the protesters and changing policy that will sharply expand the French deficit and thus dramatically shift the EU narrative.
Sterling was dragged sharply lower after UK Prime Minister May cancelled the vote yesterday and announce that she would meet with counterparts around the EU to appeal for measures that could change a future vote. On the EU side, there is a refusal to change the deal, though promises were made to offer “assurances” that seek to skirt the worst fears surrounding the “Irish backstop” issue that has been a lightning rod of criticism. More below on the GBPUSD chart.
Macron spoke late yesterday and offered a partial mea culpa and a number of policy changes, including tax cuts and a raise of the minimum wage. Most importantly, the measures will increase France budget deficit to well beyond 3.0% next year – possibly as high as 3.5-3.6% depending on the pace of French growth yesterday. This is a game changer for the EU narrative as we now have an essentially core country abandoning fiscal discipline and leaving zero credibility in negotiations with Italy in the populist governments’ plans there to widen deficits.
Were it not for the latest Brexit developments dragging sterling through the dirt, the euro might have rallied more sharply yesterday. Solidarity on the need to abandon austerity would shift the goalposts and could drastically improve the outlook for the euro eventually. Hurdles remain – especially if the EU makes a catastrophic miscalculation on Brexit as we discuss in the chart caption below – as well as whether the new German leadership can sign on to a more expansive fiscal stance – and importantly, one that is pan-European and not aimed at a narrow domestic agenda.
Cable the big move yesterday on the news that May would cancel the parliamentary vote on the Brexit deal. She is unlikely to get the EU to salvage the extant deal sufficiently. If the EU gambit is to play chicken on Brexit in the hopes that they can wring a vote from the British public in some future referendum between a stark “WTO no-deal” terms and “pre-Brexit vote status quo” I think they have another thing coming. If this is the gambit, then it would still likely require an extension of the Article 50 deadline to allow some combination of new elections and the definition of second referendum language. Regardless, GBPUSD likely to provide far more beta to the direction in sterling than EURGBP, where a darkening scenario for sterling would feed collateral damage into the euro.