With the Government’s official declaration of Article 50 on 29th March 2017, markets now wait in anticipation for the next stage of the Brexit saga. Negotiations will have a huge impact on the direction of the Pound, but the question now is one of timing.
The French elections will take priority over any discussions of the UK’s divorce, and state members will be expected to meet at a Brexit summit on April 29th to talk next steps. These guidelines will set the foundations of a united Europe, an attempt to align the vision of all 27 member states on how to deal with the UK.
In essence, getting 27 member states all with their own agendas and requirements to agree a common vision will be difficult. For some, trade with Britain is the pillar of their economy, for others, an opportunity to steal business away from London.
UK economic data so far
Until then, markets will cast their eyes over the UK economy in the wake of Article 50. Of what little data has come to light its not looking all rosy for the UK’s manufacturing sector. Whilst it remains in positive territory early signs point to a slowdown and loss of business confidence, due in part to the rising cost of importing materials.
In the wake of the Brexit vote, the attractive nature of British exports made for a thriving industry and most UK businesses lock in exchange rates well in advance of market turbulence.
There is however, only so long these attractive business rates can be offered before businesses are subjected to post-Brexit rates, and now, the reality of higher import costs has struck home.
The construction sector has seen a similar slowdown following this morning’s PMI release, and markets are already getting the jitters with the UK economy in such a vulnerable state.
The Pound has already strayed from its monthly highs of 1.178, and with 3 weeks before we understand the position of the other 27 member states there’s plenty of room for Sterling movements. On Friday we will get a glimpse of actual manufacturing production for the month of February, as well as the NIESR GDP report which provides accurate estimates of growth for the last 3 months – in the run up to Article 50.
In my view, any negative deviation from forecasts could spook markets and drive GBP/EUR rates to the lower end of 1.15.
