May removes 2019 cliff edge pound remains muted FTSE rejoices
City Index September 22, 2017 5:00 AM
The gyrations in the FX market during May’s Brexit speech in Florence speaks volumes about how it has been received
The gyrations in the FX market during May’s Brexit speech in Florence speaks volumes about how it has been received. Overall, the pound is lower than it was before she spoke, suggesting that she may have glossed over some key details that are crucial to determining the future of the Brexit negotiations.
May confirmed that the UK team, which could last around 2 years, would pursue a period of implementation, which is allowed under Article 50. Interestingly, she hinted that this implantation period might need to last for as long as it takes to get a smooth exit for the UK from the EU, which could be longer than 2 years. This was the only time during her speech when the pound bounced, and the financial markets warmly received this point.
Why the EU’s response is more important that May’s words
The fact that the pound is lower after the speech suggests that May failed to delver everything that was expected, including the rumoured divorce bill that the UK is willing to pay, although many believe it to be $20bn. Thus, the EU’s response to May’s speech is likely to be even more important for UK asset prices.
Corporate thanks for May’s 2-year gift of certainty
A weaker pound and news about the transitional period that the UK will target helped the FTSE 100 to make a fresh weekly high during the speech. The hope for investors’ is that confirmation of an implementation period after we leave the EU could foster economic confidence and protect the UK economy from weakening further next year and even falling into recession, which is good news for UK asset prices.
Financial sector wishes granted
This news is undoubtedly good for the UK financial sector, in particular, as it makes the future after March 2019 a little clearer, and UK banks have risen on the back of May’s speech. Barclays, which has a large investment bank and a large global presence, is at its highest level for a week, suggesting that May’s speech has indeed soothed fears in the City about Brexit and removed the 2019 cliff edge.
Can exes really be friends without paying up?
Exes can be friends, so says May, even if psychologists tell you otherwise. The real test for markets will be how the EU digests May’s speech. Both Juncker and Merkel had been briefed on the speech before it was delivered, however their reaction, and that of lead EU negotiator Michael Barnier, will be key to see if May’s wishes for an implementation period where the UK has access to the single market and all of the EU trimmings will be agreed with by Europe. If not, then we could see a sharp reversal in the FTSE 100 and more weakness for the pound.
May still didn’t directly address the topic of the divorce bill, and until the number the UK is willing to pay is confirmed by Downing Street, then it is hard to see how these exes can ever be true friends once again. Although May hinted that the overall bill the UK pays will include payments for our temporary access post March 2019, this may not be enough to placate Barnier and co. If the EU continues to play hardball with the UK, even after May has proffered the hand of friendship in today’s speech, then UK asset prices could slip.
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