GBP: 4 Reasons Behind This Temp Squeeze & Why You Should Fade it

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In her speech today PM Theresa May outlined 12 key objectives in negotiating the exit deal for the UK. She has already realised that being part of the single market is not an option as long as the UK wants to control immigration from other EU countries. Instead Theresa May wants to replace today’s membership with a new partnership including a new free trade agreement with EU and continued cooperation in certain areas. Although the deal will be negotiated within the 2-year time frame, which in reality means 18 months as all EU-members must ratify the deal, PM May opened up for a phased process, a transitional period for implementing it. Moreover she was very clear that the vast financial contributions to EU from Britain will end after the divorce. She also warned against a punitive deal that punishes Britain. It would also be bad for the EU as it threatens future exports to the UK. Moreover it could force the UK to change the basis of its economic model, which probably means more aggressive tax competition.

The GBP reacted positively on today’s speech and as we see it there are four reasons for this changed sentiment:

- The Parliament will have the final say on the new deal.

- A phased approach probably means a softer Brexit.

- The speech was given in a constructive tone.

- Current EU-law will become British law which will make the transition smoother.

Despite the threats in today’s speech UK’s position in negotiations will be very weak once exit negotiations under the treaty starts. There is only a two year period and to us the UK has the most to lose if negotiations fail. Moreover, the two year period will create a lot of uncertainty which is likely to harm the British economy and in particular the important British financial industry.

Consequently we view today’s rally in the GBP as temporary and expect the sterling to weaken again. We would not be surprised if comments from the EU as well as the UK sound very negative in the initial phase of the negotiations and during the exit process.


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