GBP has suffered further knee-jerk declines after UK Prime Minister May stated that the two-year timeframe for the UK’s negotiations to leave the EU will begin ‘no later than the end of March’ 2017. The ‘bad news’ is already priced in to GBP… Filling in the Brexit blanks.
Although PM May has now firmed up the timeline for the UK to invoke Article 50 (of the Lisbon Treaty), the final details of the exit negotiations remain perilously uncertain. The basis for the negotiations will be access to the Single Market (the EU), both in terms of trade in goods and services and the movement of labour. The greater the final access (as close to current arrangements as possible), the better for the UK economy – in terms of transition to new trading arrangements and the ability for growth to rebound to its longer-term trend path. However, if arrangements remain largely unchanged (a so-called ‘soft’ Brexit), the less palatable the result to ‘Leave’ voters, with free movement of labour being one of the headline aspects of the ‘Leave’ campaign. A ‘hard’ Brexit could mean no freedom of movement for people and potential taxes/tariffs for goods in addition to having to deal with many different national regulatory frameworks, particularly for financial services.
Another source of uncertainty is the political landscape in Europe, with elections in Germany, France and Italy to name just three. Changing political regimes can adversely alter the tone of negotiations dramatically and potential deals could be undone if more populist, nationalistically minded governments are elected. Notwithstanding the changing European political landscape, once the final structure is determined, businesses will be able to make decisions with clarity about the future relationship with the EU, whether that be better or worse than it currently is. Certainty is better for businesses than uncertainty. It is the current uncertainty that is keeping the Pound under downward pressure.
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We feel that the knee jerk decline in Sterling (after PM May’s announcement) will unwind as details begin to emerge on the final structure of UK-EU relations. All the ‘bad news’ has been priced into the British currency and we expect it is at its structural nadir. Although no catalyst for gains are likely to emerge in the near-term, we believe that the balance of risks is for an upside move in 2017.
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
