Sterling's 2.75% Tuesday rally is its biggest advance in more than eight years. The UK government has done a good job of managing expectations. Over the last week or so, Prime Minister May and Chancellor of the Exchequer Hammond have made it clear that the intention is a "clean break" from the EU. There is an implicit threat by both officials not to see a punitive agreement.
There was, though, little new in May's speech, except for acknowledging Parliament's prerogative to vote on the final agreement. The Supreme Court is expected to make its ruling on Parliament's role in the triggering of Article 50 early next week. There are a couple of other loose ends, such as the fall of the government in Northern Ireland and Scotland edging toward another referendum on independence. However, May still intends to trigger Article 50 by the end of Q1.
She wants to remold the relationship with the EU, maintaining tariff-free trade while not imposing the same duties on non-EU countries. This would allow the UK to have free-trade agreements with other countries, such as the US. May wants a transitional arrangement for financial services and "other companies" to allow the new rules to be gradually phased in.
The UK Prime Minister said she is prepared to walk away if Europe balks or seeks to punish the UK. While it seems that no one wins in a 'messy divorce,' the bar to exit should not be low. It is also not clear that the current parliament would support just "walking away." Once Article 50 is triggered, the balance of power shifts to the EU.
Sterling gapped lower Monday following Hammond's interview outlining the government's stance. In light of Donald Trump's comments on dollar and border adjustments and the dollar's broad dollar decline, sterling would have likely recovered With May, the market bought the fact as it has sold the rumor.
This Great Graphic shows the trendline drawn off sterling's early September high and the early and mid-December highs. That trendline is now near $1.2490 but falls toward $1.2460 by the end of the week. The $1.2430 area was the high in January and the $1.2450 area coincides with the 38.2% retracement objective of the decline since that early September high. The $1.2380 area, which was surpassed on Tuesday as sterling approached $1.24, corresponds to a 50% retracement of the down move since the December 6 high near $1.2775.
The upper Bollinger® Band (two standard deviations on top of the 20-day moving average) is found near $1.2430 too. The 50-day moving average is just above $1.2410 and the 100-day moving average is near $1.2565.