Pound shaky as Brexit talks begin
CHANCELLOR of the Exchequer Philip Hammond said Britain should aim for a gentle departure from the EU, an explicit challenge to the confrontational strategy adopted by the now weakened Prime Minister Theresa May.
British officials travel to Brussels today to formally start the EU departure negotiations, amid confusion over whether the government is going to change its priorities after failing to win voter endorsement in the June 8 election. At home, May is struggling to stay in office as her Conservative Party questions both her election strategy and her handling of a London tower block fire that has left scores dead.
Asked on the BBC how long May would keep her job, Hammond swerved the question. “What the country needs now is a period of calm while we get on with the job in hand,” he said on the “Andrew Marr Show” yesterday. “Theresa is leading the government.”
Implications
May’s government is still working out the implications of the shock election result, which saw her Tory party lose its majority. On Wednesday, its legislative programme will be set out by Queen Elizabeth II at the opening of parliament. Without the votes to force bills through parliament, May is opting for an unusual two-year session, to give herself time to pass Brexit legislation.
Yesterday’s UK newspapers contained reports of possible leadership challenges to the prime minister. Tory lawmakers are weighing whether the damage involved in replacing her would be greater than the risk of keeping her in place.
Meanwhile May has moved to quell criticism that she was slow to respond to the fatal Grenfell Tower apartment block fire in West London. On Saturday, she met survivors, and later acknowledged failings in the way different branches of government responded. “The support on the ground for families who needed help or basic information in the initial hours after this appalling disaster was not good enough,” she said.
Jeremy Corbyn, leader of the opposition Labour Party, implied the problem was a lack of compassion on May’s part. “I think everybody cares to an extent, some to a deeper extent,” he said on ITV. “And some show empathy in a different way to others.”
But even if May can stay in place, her weakness was demonstrated by the freedom with which Hammond criticised her Brexit policy. Having said on Friday that Brexit needed to be handled in a “pragmatic” way, yesterday he said Britain would still be leaving the EU’s customs union, but “transitional structures” would be needed to smooth departure.
Hammond rejected the slogan ‘no deal is better than a bad deal’, which May repeatedly used during the election.
Hammond is due to give his annual Mansion House speech on the economy tomorrow. It was delayed from Thursday after the fire. He’s planning to use the occasion to push back against hardline Brexit rhetoric. But he said this didn’t mean staying inside existing institutions.
“The question is not whether we’re leaving the customs union,” Hammond said. “The question is what do we put in its place.”
He reiterated the government’s goals of avoiding a hard border with Ireland, which will remain in the bloc, and allowing goods to move freely between the UK and the EU.
And he said it was “a statement of common sense” that “we need to get there via a slope, not via a cliff edge.”
Hammond rejected the slogan ‘no deal is better than a bad deal’, which May repeatedly used during the election. which May repeatedly used during the election campaign. – Bloomberg THE FORMAL start of Brexit negotiations today may prove more of a catalyst for the pound than an inconclusive general election, a surprise hawkish shift by Bank of England officials and a spate of disappointing economic data.
Despite the raft of surprises to hit sterling this month, it’s set to record its tightest monthly range versus the euro since 2014. That may change as, almost one year since Britain voted to leave the EU, UK Brexit Secretary David Davis and his European counterpart Michel Barnier open negotiations.
The two sides will hammer out how talks will be structured, whether there would be a transitional phase to help businesses to re-adjust to new rules and what the divorce would mean for rights of EU citizens living in the UK and Britons living on the continent.
In all of this, it’s the “tone” that interests Richard Falkenhall, senior strategist at SEB in Stockholm. He’s particularly keen to see how the two sides settle the contentious issue of the Brexit bill.
“The tone of the negotiations, whether they turn out to be constructive or the other way around, that may be very, very important,” Falkenhall said. “One of the things they will start to discuss now is how much the UK will have to pay to the EU, that will be very crucial. If they reach a solution or get closer to each other on this, then I think it’s a very, very positive sign.”
Tumultuous Time
The pound’s relative resilience to an otherwise tumultuous time in British history is in contrast with its swings in 2016. That year saw its biggest daily drop on record in the aftermath of the UK’s shock vote to quit the EU and a mysterious flash crash in October.
Sterling has traded in a range of 2.141 pence against the euro this month, the lowest since August 2014. The pound was at 87.52 pence per euro as of 3.40pm in London on Friday.
Falkenhall sees the pound weaken to around 91 pence per euro if talks turn “unfriendly”.
“The actual outcome of the negotiations is still quite difficult to predict,” analysts at Credit Agricole, led by Valentin Marinov, head of Group-of-10 foreign-exchange strategy, wrote on Friday. They said their “long-term valuation model still suggests that the best hedge against a potential hard or disorderly Brexit may be long EUR/GBP,” while the nearterm outlook for sterling remains “extremely challenging.”
Measures of implied price swings in the pound against the euro over the next one to three months are close to the lowest levels since 2015. While this is in part due to the global decline in volatility, it could change should sterling closely follow negotiation headlines.
The currency’s volatility should be “much higher than what we have right now and people are a bit too complacent,” SEB’s Falkenhall said. He sees the pound weaken to around 91 pence per euro if talks turn “unfriendly”.
Options traders are more bearish on the pound than any other Group-of-10 currency over the next three months, according to risk-reversal data. The case for turning positive on the pound still alludes most market participants.
Robeco Investment Solutions’ portfolio manager Jeroen Blokland said he has initiated a long position in the euro against sterling as “there is a chance Brexit could turn ugly.” – Bloomberg