Theresa May’s Brexit speech, although she would not use the term, signals the UK is heading for a hard Brexit. For one, the UK’s commitment to reducing immigration requires a clean break from the single market.
As ambitious as she may sound, the remaining EU members are highly unlikely to allow the UK access to its core markets without the fundamental principal of free movement of persons. This would undermine the European project, and allow other members to cherry pick from the EU menu.
Furthermore, her core message that ‘no deal is better than a bad deal’ threatens to cut ties with the bloc, putting both the UK and European markets at risk. The Chancellor Phillip Hammond has echoed similar words, by which the UK will purposely make itself more competitive for inward investment if the EU play hard ball.
The hope is that remaining EU allies would think twice about punishing the UK for its decision in June, but in reality, will 27 countries bend the rules for one member?
Pound finds limited support but for how long?
One of the key points of yesterday’s announcement centres around Parliament having a final say on Brexit terms. This provided some comfort for GBP investors but questions remain as to how the UK plans to leave the single market and acquire replacement trade deals in the limited 2 year period.
With the PM expected to invoke Article 50 in the weeks ahead, the Pound could be in for another crash course once the uncertainty hits the economy. Then there is the question of negotiations, by which the Pound’s direction could hinge on the stance taken by the remaining members.
Will the EU take a hit and stand firm on Brexit negotiations, while it may have negative implications for the Eurozone, the general consensus is that it would prevent other members from leaving the bloc. This could force the Government to retreat from any deal, and default to WTO tariffs which would hurt the British economy. This could make markets nervous, prompting further losses for Pound Sterling.
Perhaps Theresa May can achieve some special relationship, in which the UK maintains the necessary access to the markets in order to benefit its huge financial market. This would benefit the Eurozone economy, but may throw spanners in the works politically. This outcome could benefit the Pound, and would be the ideal situation for British and European businesses alike.
So much now depends on the position of the rest of Europe, and with nothing certain Pound/Euro exchange rates could sway either side of the fence.