Brexit to the fore

Britain moved closer to a Brexit deal last night as PM Theresa May’s Cabinet approved the proposed deal after five long hours of deliberation. There are still major hoops to jump through in the form of Parliament approval but this is major development after months of impasse.

Pound rises then sinks, FTSE holds

The proposal is a broad-brush strokes deal that leaves many market-relevant details yet to be determined and though the currency market’s first reaction was positive sterling started to weaken again and lost 0.94% against the dollar and 0.93% against the euro. Part of the pullback comes as detail begun emerging on what the deal will contain. For instance, the co-operation between the UK financial services industry and the EU’s will be covered by something called equivalence. Equivalence means that UK banks and insurers will no longer have unlimited access to customers across the EU and explains why banks, property developers and retailers are among the biggest FTSE fallers this morning.

If the proposal passes the various political hurdles it would cut down on the uncertainty that has governed bonds and currency markets over the last months, it would reduce some of the volatility in sterling and potentially push UK yields higher. Given that the Bank of England has been holding back on its tightening programme this year because of Brexit, a smooth deal would increase the likelihood of the Bank raising rates faster than expected to counteract the effects of inflation and wage increases.

An hour is a long time in politics

But as they say, an hour is a long time in politics and since the markets opened the UK Brexit Minister Dominic Raab has handed in his resignation, a move that hit the pound instantly. The PM will present the proposal to Parliament later today. Expect volatility across all markets until there is final yay or nay on the draft proposal.