UK Triggers Article 50, international flows crucial for Sterling
Negotiations following the triggering of Article 50 will be important, although trends in investment flows should be much more important for underlying Sterling trends.
UK Prime Minister May formally invoked Article 50 on Wednesday March 29th by delivering a letter requesting an exit to European Council President Tusk. This marks the start of formal negotiations which are due to be completed within two years.
The Prime Minister reiterated that the UK was leaving the European Union, but not leaving Europe and will seek a deep and special partnership with the EU. May accepted that there would be consequences of leaving the EU and confirmed that the UK would not seek membership of the Single Market. She wanted a bold and ambitious free trade agreement which should be of greater scope and ambition than any previous agreements.
Trade will be a key short-term focus given the medium-term importance for both the UK and Euro-zone economies. The UK wants to negotiate a new trade deal alongside the exit deal while the EU has insisted that an exit deal needs to be completed before a new trade deal can be discussed. This will be an early source of friction and German Chancellor Merkel insisted that discussions could not be concurrent.
Another area of potential friction will be the EU opposition to any trade negotiations with third-party countries while the UK is still an EU member. An antagonistic tone to the negotiations would tend to undermine confidence in both the Euro and Sterling while a constructive stance would tend to underpin both currencies.
Sterling will tend to be at risk if there is evidence of investment outflows and substantial re-location away from the UK, especially in the banking sector, while net inflows would help underpin the UK currency.
Sterling overall was subjected to volatility, although the overall impact was limited with GBP/USD in a 1.2400 – 1.2475 range.
Markets will tend to play only limited attention to political noise unless there are major stresses with UK economic trends likely to have a much more important impact on Sterling trends over the next 2-3 months.
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