UK: Sterling sacrificed on the altar of two red lines - SocGen

Analysts at Societe Generale note that the big Monday morning mover is the pound –again as UK PM May’s speech on Brexit is expected to show no wavering on the key elements of control over immigration and ‘freedom’ from the European Court of Justice.

Key Quotes

“It is virtually impossible to see how the UK can remain in the EU Single market under those conditions and it seems likely Mrs May will concede as much, while also sticking to a timetable of triggering Article 50 by March. Is there much that is new here, beyond confirmation that what everyone always suspected – Mrs May’s two ‘red lines’ are incompatible with membership of the Single Market? Although leaving the single market will be a substantial drag on economic growth in the coming years, the red lines matter more to the PM.”

“Confirmation is enough, of course, to justify another knee-jerk negative reaction by the pound and as the CFTC data show, the market isn’t anything like as short GBP as it was. But still, a significant move lower surely requires harder evidence of economic weakness. I doubt there’s enough here to get EURGBP through 0.90 or to get GBP/USD sustainably much below 1.20 on a lasting basis and if anything, Tuesday is more likely to see a short-covering bounce (from wherever we end up on Monday).”