On March 29th Sir Tim Barrow, the UK’s Ambassador to the EU, delivered  a letter from Theresa May to EU President Donald Tusk stating that the UK wishes to withdraw from the European Union and the process of negotiation begins. The clock has started.

While Brexit may have begun with the vote on June 23rd we now have a hard deadline to bear in mind. In less than two years’ time, unless an extension has been agreed by all 27 members of the EU and Walloons in Belgium, the UK will be out of the EU. How this newfound independence works for us remains squarely in the hands of the UK negotiators with the pound watching from the sidelines and, in the near term the effects of an election to dodge.

The UK goes to the polls again

Sterling initially rallied and rallied well as the news of a snap election was announced but there is little point in talking about past price action and there are three questions that must be answered to understand the outlook for sterling; what does an election do to change policy in Brussels? Can an election change the economic bearing of the UK economy and will the pollsters be proved correct

We think that any belief there is that Europe will give the UK a better deal because Theresa May has a bigger mandate at home is mistaken. Many leaders in the past have gone to Brussels with domestic victory medals shining on their chest to get little from EU leaders. We do not think an increase in the Government’s seats will change that.

On the economy, cynics would suggest that May is getting this election in before things really go to pot here in the UK. We are forecasting that UK consumption will remain weak and investment flows poor providing further opportunity for UK data to underperform.

Lastly pollsters have the Tories with a 20 point lead which looks to be unassailable. To be honest it probably is, and while her plan is likely to be to consume UKIP now that they have got what they want while remaining happy to lose some seats to Lib Dems for bigger chunks of Labour Party territory, turnout of the youth vote will once again be crucial. If 18-24yr olds who didn’t vote in the EU referendum but feel disenfranchised by its effects turnout then the numbers will look a lot different.

On this basis we believe that the markets will hold off on boosting GBP too much further than the 4 and 6 month highs against the USD and EUR that it hit in the immediate aftermath of the election call.

Negotiations to begin

Meanwhile in Brussels Michel Barnier, the EU’s head negotiator will speak with all 27 EU member states to form a loose framework of negotiating terms before a meeting of EU leaders at the end of April. Theresa May’s first request to be dismissed by the EU – the desire to concurrently hold talks on trade and the so-called ‘divorce’ deal – is hardly a surprise. The other near-term issues that will likely dominate proceedings are what happens to Brits in the EU/EU citizens in the UK and issues around the border in Northern Ireland.

Talks will continue in the meantime but we see it as very unlikely that any formal negotiations will begin until our election is out of the way.

The key battleground is trade and of the five main arrangements a nation could have with the European Union (membership of the European Economic Area like Norway, membership of the European Free Trade Association like Switzerland, a free trade agreement like Canada, membership of the Customs Union like Turkey or on World Trade Organisation rules like China) the first two, a Norwegian or Swiss arrangement, are already dead in the water.

In the near term the domestic politics may be a support for the pound but the longer term risks of Brexit will remain for sterling.

Find out how World First could work with your SME or online business in the run-up to Brexit to help manage the international currency markets. 

Further reading: How one expert turned his passion into a global enterprise