WHAT HAPPENED LAST WEEK?

A transitional deal was formally agreed. This means that once Article 50 elapses on the 29th of March 2019 the UK will have until the end of 2020 to formalise a more thorough plan of Britain’s exit from the EU.

GBP reacting to fundamentals Mar 2018

WHAT DOES THIS MEAN IN REALITY?

For the moment very little. While negotiations continue Britain will continue to act by all EU rules and regulations. As stated by European Council President Donald Tusk it will simply “delay all negative consequences of Brexit by another 21 months”.

Away from Brussels the latest deal does restore much needed confidence into the business community who were threatening to trigger contingency plans if a deal was not agreed.

I THOUGHT THE NORTHERN IRELAND BORDER WAS A STICKING POINT?

It still is to a large extent. The operational approach is yet to be confirmed but a “backstop” solution has been agreed putting Northern Ireland within the EU customs union if no other solution is found.

Talks with Brussels recommence on Monday and Brexit minister David Davis said this weekend that the UK agrees to a backstop, but not the one proposed by the EU, so the issue is still apparent. The topic is likely to dominate discussions ahead of the next scheduled EU Summit on Brexit in June this year.

WHAT DOES THIS MEAN FOR THE GBP GOING FORWARD?

The effect was clearly evident last week with the Pound appreciating sharply against the USD. However, the negotiations were not the only reason for the upward movement with underlying improvements in UK economic data (wages) coming in the context of increasingly aggressive protectionist talk from the US administration also playing its part.

Going forward the near-term prospects for cable (GBP/USD) look bright. With inflation easing off recent multi-year highs, and wage growth finally picking up, the UK consumer is seeing some reprieve from the recent squeeze on household incomes.

In addition to this the Bank of England remains on track to execute its next 25bps increase in UK interest rates this May, which when put into context of a weaker USD amid tough talk on global trade, and a further deterioration in the US fiscal situation, makes for a compelling case for cable to rise.

 

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Anthony Cheung
Anthony is a leading market commentator with over a decade of experience accumulated as Head of Market Analysis at a leading news and analysis organisation, and now a Director of Amplify Trading.