Home Breaking: May’s Brexit Speech Prompts Sterling Surge

Breaking: May’s Brexit Speech Prompts Sterling Surge

Posted by on January 17th, 2017.

May 3

For some months now Parliament and the media have been calling on Theresa May to offer greater clarity with regards to the government’s plan for Brexit. Speculation over negotiation goals has been rife, provoking sharp volatility for the Pound whenever the tone of politicians has leaned more towards a ‘hard’ Brexit. This led to some marked relief from the markets today as the Prime Minister finally set out some of her vision for the UK’s exit from the EU, which pushed the Pound dramatically higher across the board.

Government Confirmed not to be Aiming for Continued Single Market Membership

Unsurprisingly there was much emphasis on the government’s desire to have greater controls over immigration, which has been a consistent theme of the Prime Minister’s comments since the Brexit vote. Restrictions on the number of EU citizens permitted into the country have always been held up as being incompatible with the European Union’s four key freedoms – of capital, goods, services and people – which European leaders have maintained are an essential part of single market membership. This limited the downside impact of May’s confirmation that the UK will not seek to remain within the single market, as she noted that:

‘We do not seek membership of the Single Market. Instead we seek the greatest possible access to it through a new, comprehensive, bold and ambitious Free Trade Agreement.’

While fears of the UK facing greater trade barriers in its dealing with Europe – and in particular the potential loss of the passporting system on which the financial sector relies – had previously weakened the Pound that was not the case today. Instead investors seemed to react to the removal of at least some degree of uncertainty, even though the shape of any future trade arrangement remains far from clear at this time.

Prospect of Parliamentary Involvement in Brexit Boosted Pound Confidence

Investors were further reassured by the indication that Parliament could have a greater say in the deal, as May stated that:

‘I can confirm today that the Government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament, before it comes into force.’

Although this might not entail the same level of oversight that some pundits might hope for this was nevertheless a concession that sparked greater market confidence. Even though a vote may not ultimately have much impact, coming at the end of the negotiation process and likely perilously close to the end of the 2-year exit period, this was enough to boost Sterling higher.

This concession was interpreted as a signal that the UK might not ultimately be heading for such a ‘hard’ form of Brexit, easing the fears of investors somewhat. Despite May’s message appearing to lean more towards a so-called ‘clean break’ with the EU this olive branch to Parliament helped to shore up demand for the Pound.

With much of the negative impact of the speech having already been priced into GBP exchange rates at the start of the week Sterling surged, rising 2.89% on its opening levels against the US Dollar and 1.92% against the Euro. However, as the full details of the speech are absorbed the Pound may struggle to maintain this bullish form.

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