A year on from the triggering of Article 50, has sterling taken a breather while investors take profits and wait for the next Bank of England move? Or, are there more fundamental economic reasons?
The pound started 2018 at $1.35 surging to a 52-week spot rate of more than $1.43 in early February – a 6% gain. Since that time the pound has retreated to $1.39. In any evaluation of sterling’s prospects you cannot ignore the B-word. The next likely big move for sterling looks likely to emerge from the EU summit on 22-24 March.
This is where three key sterling-sensitive issues will be argued: the most important one is for Theresa May to emerge from the summit with EU backing for a 21-month transition cushion, post Brexit.
On 12 March Reuters reported that a government spokesperson believed a Brexit deal was winnable for the UK. “Yes” was the answer. But there’s doubt from other sources.
23-25 March is make-or-break
Last week ex Belgian PM Guy Verhofstadt – a Brussels hardliner for the most part – said the UK’s negotiation position was unacceptable. He was referring specifically to the rights of Europeans during transition.
“Citizens’ rights during the transition are not negotiable.” For the transition to work “there could not be two sets of rights for EU citizens”.
On the face of it, an intractable position. There are other vulnerabilities for Theresa May come 23 March, including the vexed Irish border question and EU fishing rights. Goods tariffs seem to be less of a threat than they were.
Trevor Charsley from currency brokers AFEX says, short-term, Bank of England rates look likely to rise in May, which should prove sterling supportive, but the medium term doesn’t look half as perky.
“All the cards are in the EU’s hands, more or less,” he told Capital. “If you look at Article 50 they [the EU] come up with an agreement and it’s up to us to say ‘yes’ or ‘no’. They don’t really need to negotiate.”
Facing a cliff edge
He goes on: "One of the strategies the UK government has tried to follow is divide and rule, to some extent, to try and see a split in the 27 remaining nations. We heard the Dutch and Spanish finance ministers calling for a soft Brexit in November and the pound rallied very hard through that."
“So, if the government can divide and rule, there’s an opportunity [for the UK]. The issue is that the EU is seriously not allowing any dissent amongst the ranks.” On the positive side for Theresa May, Germany’s Angela Merkel has clearly said a bespoke trade deal is not cherry picking – though France is less giving on this.