It seems to have become common currency, if you’ll pardon the pun, to defer to the wisdom of the foreign exchange markets when it comes to judging the Brexit process. The price of sterling will give a running commentary to fill the gap left by the Government’s refusal to do so, and its movements appear to have gained unchallenged authority on the issue.

You may share the currency traders’ implicit judgement that leaving the EU will be a disaster, or you may not – that’s a matter of personal opinion. But it would be an error to place complete trust in them. No doubt the market knows a lot about economics, business and finance, but what’s becoming increasingly clear is that it knows next to nothing about politics, and particularly the politics of Brexit.

Consider two recent shifts in the value of the pound.

First, the currency fell against both the dollar and the euro on Monday 3rd October. Why? The day before, the Prime Minister had made a speech about Brexit. In that speech, she announced the date for triggering Article 50 and secondly made clear that leaving the EU involves regaining democratic control of immigration policy and law-making, both of which require us to leave the Single Market. This news apparently shocked the market – as Conor Campbell of Spreadex told the BBC:

“Sterling has been spooked by May’s promise to trigger the dreaded Article 50 by the end of March 2017.”

However, the currency had been particularly unsettled by the prospect of the UK leaving the EU single market, he said.

“The PM, in a move to appease the more rabid members of the Tory party but one that is set to cause revolt from the backbenchers, has signalled that curbing immigration is the top Brexit priority even if it comes into conflict with Britain remaining in the single market”…

“Combine all this volatility together and the pound has been left at its worst price since the start of July.”

In what world did any of the things which May said come as a genuine surprise?

For a trader to be “spooked” by the news that Article 50 will be triggered next year, they must have previously thought Brexit was not really going to happen. That prospect might be touted by a dwindling number of Eddie Izzard’s acolytes, but the reality of Brexit is blindingly obvious to anyone who can work out that 17.4 million is a lot of votes, or who has listened to the new Prime Minister at any point since she gained office.

Similarly, anyone paying even a little bit of attention to the referendum campaign would have been able to notice that regaining control of our borders and our laws was quite a fundamental part of leaving the EU. Even the Remain campaign argued that securing these aims would require leaving the Singe Market.

It isn’t “volatility” for the Prime Minister to reiterate these facts – the fall in sterling on the back of her doing so was a sign that some of those trading foreign exchange had indulged in quite a lot of wishful thinking, and were giving undue weight to some fundamentally unreliable sources of political advice.

The second example was yesterday’s rally in the value of the pound. What happened to raise the price? As the FT reports:

The pound had its best day since fears of a “hard Brexit” gripped the currency market two weeks ago after a UK government lawyer said that parliament would have the final say on whether to accept Britain’s exit deal with the EU.

Theresa May, prime minister, has refused to allow members of parliament to vote on triggering EU divorce proceedings, and in a High Court proceeding in London on Tuesday, government lawyers insisted that refusal is legal.

But James Eadie, a lawyer for the UK government, also told the High Court that the final deal with Brussels, which would be negotiated over two years after Brexit is triggered, was “very likely” to be subject to parliamentary approval.

It seems that the market takes the view that Parliament getting a vote on the eventual Brexit deal will help to secure the things that they want – particularly Single Market membership – and traders have therefore become more optimistic.

But this, too, is a judgement based on a serious misunderstanding of politics. MPs won’t be getting a vote on a motion requiring Britain to stay in the Single Market, or on some softer relationship like Norway’s. They’ll get a vote on May’s negotiated deal – which she has already said will involve escaping the authority of the ECJ and regaining control of our borders – and the alternative on offer will be no deal at all. In short, it will be May’s pretty hard Brexit, the details of which are yet to be hammered out, or the hardest of hard Brexits: leaving the EU on WTO trade rules.

Again we see that some of those in the City of London appear to be either woefully uninformed or woefully misinformed about what is going on in the City of Westminster. The idea that this eventual vote could ever offer MPs the option of a Soubry-Farron approach of essentially staying as close to full EU membership as possible is a fantasy. Even if it was on offer, the idea that MPs, most of whose constituencies supported Leave, would actually vote for an arrangement which includes continuing open borders and the supremacy of EU law is completely barking. As it is, those MPs who fear excessive barriers to EU trade are hardly going to turn down a May deal, however little they might like it, if it means choosing WTO rules instead.

Markets are great mechanisms, but they have never pretended to be the bearers of established and constant truth. Rather, they are processes for collective learning through argument and experience – business models, products and government policies are championed and scrutinised, weighed and tested, and the lessons of both success and failure are incorporated to make better judgements next time. The currency markets’ pessimism about leaving the EU (and the Single Market) could yet be proved right or wrong – that remains to be seen. But what’s already clear is that some of the information and assumptions on which they are acting are simply wrong. The result is that at various times the pound is being overpriced or underpriced on the basis of misunderstandings about the decision-making process that underlies this essentially political issue.

This failing adds extra volatility to the currency, because when politicians say things that they believe are either obvious or uncontroversial, traders are evidently startled to hear things which conflict with what they thought they knew, and the value of sterling is suddenly corrected as a result. The markets need to get better advice.

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