Theresa May’s much awaited speech on Brexit yesterday was pretty much as expected.
She laid out a position where the government intended to remove the UK from the single market (and therefore restrictions around its membership, including movement of labour) and focus on negotiating ongoing membership of the customs union – which is essentially, the zero-tariff element of the single market.
Why the Pound has Risen
Sterling has bounced sharply following Ms May’s speech. We think the reason is that he comments point towards government positioning for a softer rather than harder Brexit. For one thing, she confirmed that there would be a final vote in parliament on the deal (which lessens the likelihood that more extreme elements of the government will push for a hard Brexit). But also, Ms May mentioned the government’s desire for a “phased process of implementation” – which hints that the government will try to extend its two-year negotiation window that the signing of Article 50 of the Lisbon Treaty (expected by end-March) will trigger.
What does this mean for sterling assets more generally?
A softer Brexit would lessen the economic damage from the UK’s departure from the EU and supports our view that the UK economy will be fairly robust in the first half of this year, supported not least by ongoing ultra-low levels of official rates. Set against a backdrop in which inflation is rising in the UK, anything which further supports the robustness of the economy, will strengthen speculation that the next move in interest rates will be upwards. We don’t expect this to happen this year but, at the same time, do not rule out this possibility entirely. Certainly, we expect speculation to build through the year of a potential rate hike. This need not be negative for equities if it represents, as we expect it will, a response to a robust economy. Our core view remains that sterling will move into a period of greater support in coming months and the equity market will also continue to remain well supported.
The 12 Point Brexit Plan Outline Today by Theresa May
1. Provide certainty about the process of leaving the EU
2. Control of our own laws
3. Strengthen the Union between the four nations of the United Kingdom
4. Maintain the Common Travel Area with Ireland
5. Brexit must mean control of the number of people who come to Britain from Europe
6. Rights for EU nationals in Britain and British nationals in the EU
7. Protect workers’ rights
8. Free trade with European markets through a free trade agreement
9. New trade agreements with other countries
10. The best place for science and innovation
11. Co-operation in the fight against crime and terrorism
12. A smooth, orderly Brexit