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Domestic politics have helped strengthen the pound, but is it enough?

The announcement of a snap election rallied the pound against a murky future, but there are many more factors at stake.
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The announcement of a snap election rallied the pound against a murky future, but there are many more factors at stake.

The countdown to Brexit began on 29 March when Tim Barrow, the UK’s Ambassador to the EU, delivered a letter from prime minister Theresa May to EU president Donald Tusk formally announcing the country’s withdrawal from the union. We now have a set timeline for negotiations.

The UK will be out of the EU in less than two years’ time, unless an extension is agreed by all 27 members. How the UK will be affected by this momentous move remains in the hands of the Brexit negotiators, and how trade agreements with the EU will look two years down the line is something of a mystery. In the short-term there will be a general election, and it remain to be seen how the pound will react to these political waters.

The snap election

The UK is going to the polls again, and the pound initially rallied well to this sudden news. There are three questions that need answering if we are to be able to reliably predict how the pound will react: what does an election do to change policy in Brussels? Can an election change the economic bearing of the UK economy and will the pollsters be proved correct?

World First believes that those claiming that Europe will give the UK a better deal because Theresa May has a bigger mandate at home are mistaken. There is no evidence to suggest that a victory on home turf will translate to greater esteem from the EU leaders, and therefore an increase in this government’s seats is unlikely to secure more confidence abroad.

An alternate, and perhaps more cynical reading of current events, would be that May is getting the election in early before the UK is totally de-railed by Brexit chaos and thus hoping to secure her premiership for as long as possible. World First is forecasting that UK consumption will remain weak and investment flows poor, providing further opportunity for UK data to underperform.

It is possible that May’s plan is for the Conservatives to consume all of the remaining Ukip seats now that they have got what they want. The Tories have a 20 point lead, according to pollsters, but if the 18-24 year-olds who didn’t vote in the EU referendum and were unhappy with the turnout can be coaxed into voting the numbers may end up looking a lot different.

It is because of this that World First expects the markets to hold off on boosting GBP too much further than the four and six month highs against the USD and EUR that it hit in the immediate aftermath of the snap election announcement.

Ready…set…negotiate

Over in Brussels Michel Barnier, the EU’s head negotiator, spoke with all 27 EU member states to form a loose framework of negotiating terms before a meeting at the end of April. Theresa May’s request to hold talks on trade and talks on the “divorce deal” at the same time has been denied, and it can hardly come as a surprise to anyone.

The German chancellor, Angela Merkel, argued that it did not make sense to negotiate a future relationship between the UK and the EU without the agreeing the financial commitment to the EU in advance.

Merkel also said that: “Countries with a third country status – and that’s what Great Britain will be – cannot and will not have the same or even more rights as a member of the European Union. All 27 member states and the European institutions agree on this.”

Another matter likely to be high up the agenda is what will happen to British citizens in the EU and EU citizens in the UK. There will also likely to be near-term discussions regarding the border in Northern Ireland.

Although talks will be ongoing, it does not seem likely that any formal negotiations can take place until the general election has been completed.

There are five main kinds of trade arrangements for countries to establish with the EU, including: membership of the European Economic Area like Norway, membership of the European Free Trade Association like Switzerland, a free trade agreement like Canada, membership of the Customs Union like Turkey or on World Trade Organisation rules like China. A Norwegian or Swiss arrangement for the UK have already been ruled out.

The future is still murky and difficult to predict, but in the short term domestic politics may be a support for the pound – even if Brexit is still a looming risk for sterling.

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World First

Experts in international money transfer and currency exchange.

Real Business