Last evening’s price action proves that political risk remains a primary driver for sterling

29th November 2017

Last evening’s price action once again showed the extent to which political risk remains a primary driver for sterling. Even though talks on substantive issues of trade have not even begun, and the Irish border remains a stumbling block, these initial signs of compromise from May are a very good sign and have given sterling a boost that we can expect to become characteristic of good news from the negotiations.

The issue now seems to be if May and Davis can maintain enough political support within their own party to make the necessary concessions to get negotiations moving when the offer is officially presented next week. EU negotiators have had their first big win, it seems, and are unlikely to easily begin compromising on other key EU principles that will prove contentious in the UK, most notably the trade consequences of Britain abandoning the principle of harmonisation with EU regulations.

If Theresa May does indeed succeed in formally moving negotiations on to substantive issues next week, and manage to hold her own Government together while doing so, it will undoubtedly be good news for sterling. What is unlikely to change is the extent to which headline risk remains a factor for sterling – any setbacks or near collapses in talks are likely to be felt just as keenly as last night’s good news.