UK: May’s government to survive at least another week - Rabobank
The fact that PM May and EU Commissioner Juncker were able to announce last week that Brexit transition talks can start means that Theresa May’s government is set to survive at least another week, according to Jane Foley, Senior FX Strategist at Rabobank.
“On Thursday, there were reports from both sides of the channel suggesting that if a compromise could not been announced today that May’s premiership may not survive for more than a few more days. From the point of view of Brussels this could mean negotiations would have to be continued with a hard line Brexiteer Conservative PM such as Gove of Johnson. This means that on both sides there was a strong incentive to announce today that sufficient progress had been made on legacy issues and that EU/UK trade talks would be allowed to commence. However, some clarity regarding the N. Ireland border issue still appears to be missing.”
“All parties involved support the case for no hard border across the island for Ireland in support of the Good Friday Peace Agreement for the region. At the start of the week an agreement with respect to the region appeared to stall because the Northern Irish Unionist DUP party (upon who the minority UK government relies upon for support) refused to accept a different economic arrangement for N. Ireland to the rest of the UK. Monday’s deal reportedly would have proposed that N. Ireland could be in effect allowed to remain within the customs unions. This morning PM May announced that there will neither be a hard border nor will there be any impact to economic integrity across the UK. However, on the assumption that the UK leaves the single market and customs unions, it is not clear how these two factors will be reconciled. The implication is that with respect to N. Ireland there is still work to be done. That said, the text of the agreement does state that should the UK and EU fail to agree a final trade deal, the UK will maintain "full alignment" with those rules of the internal market and customs union that help to protect northsouth cooperation in Ireland.”
“The fact that the UK government is likely to remain in place in the near-term is a supportive factor for GBP. Also, the fact that trade talks can finally start is another positive for the pound. However, with only 15 months to go before the start of Brexit, the market will be under no illusion that the trade talks will be straightforward. EC President Tusk warned this morning that the “most difficult steps in Brexit lie ahead”. It remains our view that 2018 could be a rocky ride for the pound with cloudy skies mingled with just a few bright spells remaining our base forecast.”
“In celebration of the fact that the UK has likely avoided a near-term leadership challenge, we have on Friday revised down our EUR/GBP forecast a touch to 0.87 to 0.88. However, in view of the fact that trade talks are still likely to be rocky and that many questions around the N. Ireland issue remain, we have left our 2018 forecasts for a higher EUR/GBP in place. That said, while we would not rule out a move towards the EUR/GBP 0.95 area during the course of 2018, we have pencilled in a sharp drop for EUR/GBP on a 15 month view. This assumes that the politicians do manage to put in place a best case free trade deal, but that it is again of the last minute variety.”