#BREXIT A long term fundamental outlook on its impact on #GBP. Part 2 of 2: Economic fundamentals

There is large number of publications dedicated to the effects of #Brexit to the economy of the UK.  They all agree that this is uncharted territory and the vast majority conclude that the closer the future trade relationship with the EU is, the less damaging the effects.  The case of  "no deal" could be catastrophic for its economy and it is considered highly unlikely.

The scope of this analysis is not to analyze the effects of the #Brexit final trade deal on the UK economy.  

Its scope is to take a brief look on the current economic fundamentals  and how these are relating to the #GBP value in the short to medium term and while the trade talks last.

And this can be done in just a few words. No graphs and no numbers needed.

If #Brexit is taken out of the equation there is nothing in the fundamental economic data of the UK that could possibly justify neither the current value of #GBP nor a sudden and sharp downturn from its current value.  

Yes, the growth forecast for 2018 and for the consecutive years has been cut, and yes, domestic spending is decreased etc.  These factors that under normal circumstances would have major effects on the value of #GBP, at the moment and for the duration of the negotiations will have very little effect (unless unexpected and dramatic data is published-this is very unlikely).

#GBP is driven by the course of the #Brexit negotiations.  Once these reach a final conclusion then the economic data will kick in again and play the major role on the currency's value.

#Brexit has devalued the pound dramatically.  

When the markets figured out what would be the course of events (the course.. not the outcome) the appreciation started.

When it was made clear that all procedures are going too be gradual, that there will be a transition period, and that the whole process will be phased out, the markets priced that in, and #GBP has reached its current levels which are close to the pre-Brexit levels. 

This is natural market behavior.

This behavior will definitely continue for the duration of the #Brexit negotiations. The chart of #GBP will be primarily defined by negotiation related events and by economic data secondarily.  

These will provide the momentum for uptrends or downtrends. 

Since the negotiations are going to be by definition lengthy and complex, and the political scene in the UK is fragmented without any clear vision as to what a final deal should look like (and it will remain so for many months), the ride is going to be bumpy.  Much more bumpy than it was the last months.  #GBP will have both short and sustained swings as well as plenty of spikes in its value.

These swings are not going to be caused by minor events as it was the case the months after the referendum when a minister would sneeze and #GBP would dive.

The markets after the #EUR crisis are more accustomed to lengthy negotiations involving the EU. 

By the EU they will expect a solid stance not backing an inch from the core of its fundamental principles concerning custom and freedom of movement of people and goods.  They will expect very little flexibility on these issues.  At the same time, they will expect no changes in its positions once publicly expressed, on issues other than its fundamental principles.   They will expect it to show a patient attitude towards changes in the British approach on the negotiations (which will definitely happen).  And as it is typical of the EU, the markets will not expect it to do any sudden swings in its approach to the negotiations and to be flexible towards deadlines (as long as the other side wishes it also) despite the fact that it will publicly say the opposite.

From the side of the UK the markets will expect a very different negotiating environment.  

One factor that they have already priced in the value of #GBP is that a hard #Brexit and a no deal scenario, although possible, it is very unlikely to happen.  However, whenever the chances for that increase this will show on  #GBP.  This does not include comments of a minister or even its resignation.  This could be caused by a lengthy deadlock in negotiations, a real political crisis that would threaten the stability of the government, etc

Another thing that they would expect is lots of talk and less action.  Sequence of events similar to that of the #Brexit bill are likely to happen over and over again during the talks.

The markets are well aware that the primary factor that will affect the outcome is British politics.  The stability of Mrs May government will be an issue that will have great influence on #GBP.  

More importantly though, possible elections during the talks and a new Labour government could and probably would be a factor that would cause very big moves on #GBP.  Mr Corbyn's Labour is an unknown factor to the markets despite his current rhetoric that is pro to a model close to that of Norway.  And this factor is not and will not be priced in until not only his intentions but his actual actions are clear.

The stance of the BoE and its policy on rates  is the one economic fundamental factor that will have a major impact on #GBP.  A rate hike is expected sometime soon, and more are possible during the talks.

However, the effect of these possible rate hikes will  depend on the level of the negotiations and the state of #GBP at the time.  It could be a strong momentum boost or it could be a support move. It is impossible to tell.

So, in conclusion. in the long term #GBP will be primarily and and mainly be influenced by the political fundamentals and secondarily by the economic data.  

If the the negotiations, although bumpy, are heading towards a positive direction then #GBP will be on the rise.

If not the opposite will happen.

As described in detail on the conclusion of part 1 of this analysis, the general positioning on #GBP pairs at the moment is long with extreme caution.  Constant re-evaluation depending on events is essential.