Divided UK Prepares for Brexit

The United Kingdom is about to begin negotiations to leave the European Union nearly seven months after voting to exit the bloc in a dramatic referendum. No country has ever voted to quit the EU, so many investors are still unsure how the divorce proceeding will go.

British Prime Minister and hard Brexiter Theresa May tried to clear up the confusion over the weekend by giving the clearest signal yet that her country will make a decisive break with the Single Market.

In a television interview on November 8, the Prime Minister said she intends to regain full control of immigration while agreeing to “a really good, ambitious trade deal” with Brussels.

May also warned that a so-called “soft Brexit” was not in the cards, as London is not prepared to “keep bits of membership” of the EU after leaving.

“People voted to leave the EU but also voted for change,” she said, as quoted by UK Daily Express newspaper. “This year is the year we start to make that happen.”[1]

May intends to trigger Article 50 of the Lisbon Treaty, the formal mechanism for exiting the bloc, by the end of March, but a recent High Court ruling complicated those plans. The judgment said the British government must first obtain parliamentary approval before beginning the formal Brexit process. May has appealed the decision, which is now in the hands of the Supreme Court. Lawmakers are expected to deliver their ruling later this month.[2]

As the Sunday interview clearly showed, May was not compromising on her plan for a hard Brexit, setting up for a possible clash with the Supreme Court.

“We are coming out. We are not going to be a member of the EU any longer. The question is – what is the right relationship for the UK to have with the EU when we are outside,” she said.

Tory MP Steve Baker described May’s stance as a “welcome clarification” and a “sensible position.”

Not everyone was impressed, including UKIP leader Paul Nuttal, who said May’s position is “vague, muddy and ultimately opaque.”[3]

When it comes to Brexit, several lingering questions remain. Will the UK retain tariff-free access to the Single Market, and how will Brexit impact financial institutions’ passporting rights? How will the negotiations impact EU nationals living in the UK? Will Brexit harm Europe’s stagnant recovery, and how will the financial markets respond?

British equities have fared tremendously well in the wake of the Brexit vote, as the Bank of England (BOE) has taken precautionary steps to withstand the economic blowback. In doing so, it expanded monetary policy, providing British equities with more fuel.

Expansionary monetary policy combined with rising oil prices and a seasonal ‘Santa Claus’ rally to push the FTSE 100 to new record highs. The benchmark index is up around 12% since the EU referendum on June 23.[4]

The market has also been propped up by an ailing British pound, which at one point sunk to 168-year lows against a basket of other major currencies in 2016. Pound sterling may have yet to find its bottom, as investors prepare for volatile Brexit negotiations in the near future. Consensus forecasts expect pound sterling to struggle throughout 2017 as the UK economy may cool and inflation overshoots its target.[5] A surging US dollar may also make the pound one of the weakest currency links in 2017.

The British economy held up surprisingly well in the months following the referendum, but momentum appears to be waning. The cloud of uncertainty surrounding the Brexit negotiations may also weigh on consumer and business sentiment for the foreseeable future

[1] Macer Hall (January 8, 2017). “Brexit latest: Theresa May suggests Britain WILL leave EU’s single market.” UK Daily Express.

[2] BBC News (December 5, 2016). “Supreme Court Brexit Case: ‘No need’ for MPs to get final say.”

[3] Macer Hall (January 8, 2017). “Brexit latest: Theresa May suggests Britain WILL leave EU’s single market.” UK Daily Express.

[4] Adrian Lowery (December 28, 2016). “Santa rally sends UK stock market to all-time high as FTSE 100 index of top shares closes at record level.” This Is Money.

[5] Joaquin Monfort (January 7, 2017). “Impact on the British Pound of a Smooth and Orderly Brexit.” Pound Sterling Live.

The post Divided UK Prepares for Brexit appeared first on Forex.Info.

Source:: Divided UK Prepares for Brexit

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