The House of Lords has passed the Brexit bill, giving Government the right to trigger Article 50 by the end of March. The Pound initially retracted below 1.13 against the Euro, as markets prepare themselves for the big unknown, before climbing higher above 1.142 at the time of writing.
Clarity has always been a huge problem for Sterling investors, and while the latest update provides huge relief it does pose more risks than reward.
The direction of the Pound now hinges upon one important factor, what will post-Brexit Britain look like.
Up to now, the UK has remained in a state of limbo which in the short term has provided Sterling investors with comfort in light of strong economic performance. Now, the real test for the UK will unravel as the UK attempts to negotiation the best deal possible from its remaining EU members.
Negotiations to dictate Sterling’s fate
GBP/EUR exchange rates have bottomed out at the higher end of 1.13, but there are strong arguments for ranges much lower than this. Firstly, there is little doubt that the negotiation will bring some emotion to the table. The UK has always seen itself as different from its remaining member states, joining the bloc 8 years after its initial application.
And now it would seem that the PM wants all the good bits without full membership, or face the possibility of defaulting to WTO tariffs if a bad deal is struck.
The alternative is to seek a free trade agreement likened to that of CETA – the Canadian-EU trade deal that took almost a decade to ratify. The issue is not one of time, but with 27 member states all with their own say on post-Brexit terms, hopes for a free trade deal within the time-frame set out by Article 50 (two years) seems untenable.
Hard decisions for Scotland
The prospect of a soft-Brexit look unlikely given the stance taken by the Tory Government. Theresa May has made it clear what Brexit means, and believes that the public voted to end uncontrolled immigration as a primary goal. The only way to achieve this is outside of the EU, a message echoed by many EU officials including Angela Merkel and Jean-Claude Juncker.
The UK as a whole must leave the bloc unless some special relationship can be maintained, and with this comes the issue of Scotland, a country that voted in favour of EU membership but must follow the rest of Britain in its current form.
It has been suggested by Nicola Sturgeon that a second Referendum on Scottish independence should take place sometime between Autumn 2018 and Spring 2019, paving the way for an independent Scotland who can then sort an application for EU membership from scratch.
Without further clarity on the Brexit decision I envisage further declines in the Pound’s value in the near term.