Politics and the Pound –A

World First Webinar

Jeremy Cook

Chief Economist and

Head of Currency Strategy

• A New PM

• ‘Brexit means Brexit’

• Single Market vs Immigration

• Eyes in Europe

• Division of Labour

• The timeline of politics

• Hammond to the fore

• Implications for the pound

Westminster and The City

• Theresa May as Prime Minister has reduced political uncertainty in the UK and in the wider

Europe, but signs of pronounced economic weakness may shorten any honeymoon or

market driven goodwill.

Source: Bloomberg

• Hard to imagine more testing circumstances for an incoming leader to face. Mrs May will

need to unite a deeply divided country following the vote to leave the EU, bring

together the opposing sides of the Conservative party and fulfil the task of actually

taking the UK out of the EU and negotiating a strong deal for the country. On top of this,

she has begun to set out the makings of a reforming policy programme, with proposed

changes to corporate governance indicating a different attitude to big business and ‘The

City’ than that of her predecessor.

• A 2nd referendum has been ruled out as has a near-term General Election

• Has limited Brexit fallout within her own party and quelled Scottish voices however her

Cabinet appointments have raised eyebrows.

• Pressure to invoke Article 50 of the Lisbon Treaty is increasing on a day-by-day basis but

we do not think that it will take place this year.

• Her appointment of Messrs Johnson, Davis and Fox as Secretaries of Brexit facing

departments is being seen as clever and insulates her Premiership.

• Canada has summed up the trade mood with Canada's International Trade Ministry

releasing a statement saying that their first priority was to ratify the Canada-EU

Comprehensive Economic and Trade Agreement. That was a clear sign that, despite the

optimism, experts still warn any trade deal will take years to complete.

Source: Citibank

• This is the unsquareable circle and has been brought up countless times by European

leaders (Hollande, Merkel, Renzi and von Rompuy)

• Secretary for Brexit David Davis believes that the EU will allow Britain a good deal, despite

repeated warnings from senior EU figures. 'The ideal outcome, (and in my view the most

likely, after a lot of wrangling) is continued tariff-free access. Once the European nations

realise that we are not going to budge on control of our borders, they will want to talk, in

their own interest,' he said.

• The Theresa May Government is yet even to fully guarantee existing EU citizens rights,

nor the fate of those who move to Britain before an exit deal is finalised. Theresa May has

also made her more restrictive views on immigration clear which has rankled those on the

continent.

• Procrastination is seen as hurting the UK not just economically but also politically, as the

EU legislative machine will rumble on without UK input. So far the EU has always been

careful to keep the UK involved in discussions over new legislation, particularly when it

comes to financial markets. Not anymore.

• Britain will indeed exit the EU. No one sees any realistic possibility of the decision being

reversed. Apparently, few think the UK will move to join the EEA (the Norwegian Option),

which might be the best solution economically but does not allow for border controls and tis

therefore politically inviable

• We think that a UK-specific solution will have to be negotiated where limiting EU

immigration would come at the price of compromised access to the single market.

• Europe is of course on holiday for a month now so the conversation will calm for now

however terrorism attacks will not help anti-migration pressures.

• Jeremy Corbyn, current Labour Party leader,

will face a challenge from Owen Smith MP.

• The election is due to occur during the

summer, with the winner to be announced on

24 September, just prior to the Labour Party

Annual Conference

• Recent polling by YouGov puts Corbyn

ahead of Smith at 56% with Labour Party

members (18 July). Furthermore, Labour

Party membership continues to rise: 3,000

pro-Corbyn members joined the week

commencing 11 July, according to The

Independent, on top of the c.183,000 who

joined in the 48 hours to 21 July.

• Rather ineffectual opposition to the

Conservative party may allow for additional

strength within parliament.

The timeline of politics

June 2016 Q3-Q4 2016 2017 2018

23 June: UK referendum

result announced in

Manchester Town Hall

24 June: Likely resignation

of Cameron, triggering

leadership contest

24 June (or shortly

afterwards): UK formally

make request to withdraw

from EU and trigger article

50 provisions

Q3: Domestic Conservative

party leadership contest/new

PM to take office

Q3/Q4: UK and EU to

establish working

method/process and

indicative timetable for

“divorce settlement”

2017: Renewed pressure for

Scotland and N Ireland to

hold referendums on

Independence / EU

membership

Q3/Q4: Formal end of two year

Article 50 Process. UK to

formally cease EU membership

unless extension agreed by

agreement of all EU leaders.

Process of disengagement from EU including amendments to national law 2026?

• Looking for the ‘Reset’ button

• We expect a recession in the second half of the year and

only a gradual recovery that will be pockmarked with lower

employment and increases borrowing.

• We expect that Hammond and the Treasury will announce

a slew of new measures in the November Autumn

Statement. Likely policies to drive consumption and

increase investment although we do not expect a splurge.

• Housing market could easily be supported via cuts to stamp

duty and/or increased help for Help to Buy.

• Difficult to see a world within which the pound has hit its bottom. Obvious risks remain to

all forecasts with political risk increasing in the US as we close in on the Presidential

Election.

• We like to think of the future for sterling as a series of shoe drops, alternating political and

economic pressures. The first political shoe to drop was the Brexit vote, the first economic

shoe to drop is upcoming economic data and the reaction of the Bank of England,

• We then follow with political news in the form of viability studies on certain negotiations and

then likely doubts over our ability to rebound economically.

• It is our opinion that there is currently 6-7% more for GBP to fall in most crosses contingent

on recession, stimulus and political risk elsewhere.

Source: Bloomberg

Source: Bloomberg

Questions

• These comments are the views and opinions of the author and should not be construed as advice. You

should act using your own information and judgment.

• Whilst information has been obtained from and is based upon multiple sources the author believes to

be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.

• All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are

subject to change without notice.

• Any rates given are ‘interbank’ i.e. for amounts of £5million or more thus are not indicative of the rates

offered by World First.

Disclaimers