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Sterling volatility to remain as Article 50 is triggered

When UK prime minister, Theresa May, initially announced that she intended to trigger Article 50 by the end of March, and said the UK wouldn't be looking to stay inside the single market or customs union, the pound took fright, briefly dipping below $1.2000 against the US dollar before rebounding.

This failure to fall below the $1.2000 level is encouraging in the broader sense in that what markets are increasingly viewing as a clean or hard Brexit, depending on your political persuasion, is mostly priced into the market.

Theresa May’s 12-point plan for the UK’s Brexit negotiations appears to have soothed market concerns that there will a cliff edge Brexit, as she indicated a desire for a transitional deal, with a phased implementation timetable if negotiations extended beyond 2019, which does seem likely given the potential for complexity.

Now that the bill to trigger Article 50 has successfully passed through the House of Commons the House of Lords now have the opportunity to scrutinise the bill with some attempts to amend the bill increasingly likely given the lack of a Conservative majority in the unelected Upper House.

If these amendments get inserted into the bill it seems likely that the government will take them out and send the bill straight back to the Lords in what could turn into a game of parliamentary ping-pong.

This might delay the timetable for when the government is able to trigger Article 50 which has a deadline for the end of March, but which the prime minister may want to trigger before that, to avoid a clash with EU celebrations of the 60th anniversary of the Treaty of Rome.

Once the UK government submits its intention to leave the EU the phony war will then have ended and the two-year process will then look to begin in earnest.

In the short term though nothing much will change given that EU leaders in France and Germany are likely to be distracted by their own political problems until October at the latest with French elections set to be concluded by the end of May and German elections by the end of September.

This means that Theresa May could in all likelihood be dealing with different political opponents to the ones she is facing now.

In France Francois Hollande is on his way out which means whoever wins in France will be a completely different proposition to now.

There is the distinct prospect that whoever wins in France will be a lame duck president, if independent candidate Emmanuel Macron wins he won’t have a party political apparatus or any fellow MP’s behind him to be able to enact anything resembling significant structural reform. If Marine Le Pen wins she will have the same problem in that the number of MP’s her party will have in the French parliament will be quite small.

In Germany there is the distinct possibility that Angela Merkel could lose to an even more pro EU candidate in the form of ex MEP and European Parliament president Martin Schulz.

His election could prove even more problematic for the UK as he could well adopt a much less pragmatic approach to negotiations than his predecessor.

For now the pound is holding up fairly well with the UK economy almost at full employment but starting to show signs of a bit of a consumer slowdown. The next few months are likely to prompt some significant ups and downs but there is likely to be very little progress until the end of the year once the political fog of 2017 starts to clear.


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