Three reasons to still be wary of a Hard Brexit

On January 16, Britain’s Prime Minister, Theresa May laid out the government’s plan to proceed with Brexit. She made it clear that she will push for a clean break from the EU without maintaining the vestiges of an half-in, half-out membership.  Mrs. May also laid out a 12-point plan detailing how she’ll push for the best deal for Britain during the negotiations. In addition, she talked about her plan to negotiate new trade deal with the EU and other countries as a global Britain emerges.

Her words laced with clear-cut direction and bravado lifted the hearts of the 37% of the electorate who voted for Brexit and hope for a better post-Brexit world ahead. Soon after she delivered her speech, the pound recorded a massive rally to end the session with 2.36% gains to mark the biggest daily gain since 2008. UK’s stocks as represented in the FTSE 100 also recorded a decent gain in the session.

While it easy to get caught up in the euphoria that followed the talks on a clean break from the EU, we can’t afford to ignore the fact there’s still an element of uncertainty when the negotiations get underway. This article provides insight into some of the issues that could cause volatility in the financial markets when the Brexit negotiations get underway.

The pound is not yet in the clear

The first reason it might be a little too early to celebrate the gains that pounds recorded in the forex markets is that Theresa May’s speech wasn’t the only driving force behind the gains. A day before Mrs. May delivered her detailed Brexit plan, U.S. president elect, Donald Trump had made some visceral remarks about the U.S. Dollar. He observed that the “the dollar is too strong, and it’s killing us” and his words had the negative effect of pushing the USD down in the forex markets.

Hence, when Theresa May delivered her bravado-laden speech, the Pound found it much easier to rise against the already weak dollar. However, the fact that drives home the point is that the Euro, Japanese Yen, Russian Rouble, and Mexican Peso among others also became stronger against the dollar. Victor Alagbe, an analyst at Stern Options observes that, “the rally in the pound after Theresa May’s speech enjoyed bullish tailwinds because the timing was perfect in that the dollar was already weak.”

Notibly, what many of the mainstream press didn’t report was the large falls in sterling prior to the speech after much of the content was leaked beforehand.  This meant that the markets factored in the shock before the speech was given and the net sum gain seen on the currency market was marginal.

UK is not the sole arbiter of Brexit

The second reason it is too early to rejoice on how Brexit would benefit the UK economy is that UK is won’t be the only country determining how the Brexit negotiations plays out. Granted, Theresa May is heading into negotiations with a clear cut picture of the terms she wants and she is willing to walk away in noting that “no deal for Britain is better than a bad deal for Britain.”

Nevertheless, the Brexit negotiations can’t be successful unless the remaining 27 member nations of the EU agree to the terms. Interestingly, investors are already acting as if the Brexit is a done deal; yet, Britain can’t be the accused and jury at the same time in the Brexit negotiations.

Brexit is still at risk of politics

Thirdly, the process of negotiating and achieving Brexit will requires a lot of give and take in Britain’s political landscape and with the EU. Theresa May has said that parliament will vote on Brexit after losing her appeal to the high court to trigger Article 50 without parliamentary consent, but the vest majority of members of parliament belong to the “Bremain” camp and there’s no telling the volume of politicking that will be required for the UK to present a common front to the EU.

Crucially, Scotland voted overwhelmingly to remain in the UK, so don’t expect the SNP to roll over and accept folly proposals that only appeal to UKIP and the far-right section of the Tory party.

More so, diplomats and business leaders in Europe have observed that Britain will actually be coming to the Brexit negotiations from a point of weakness.  French centre-right MEP Alain Lamassoure observes that Britain is towing a suicidal path. In his words,  “It’s clear the interest for the British is 500 million customers in Europe, not just 65 million in Britain. When May comes to negotiating with a country like China, she can only offer 65 million British customers. It’s a kind of economic and business suicide.”

 

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