Brexit: Pound recovering before Supreme Court ruling

Deutsche Welle
4 Min Read

On Tuesday, the British Supreme Court will decide whether Parliament should vote to commence divorce proceedings from the European Union. Investors are welcoming this because above all they need one thing: certainty.A day before the Supreme Court’s decision of whether British Prime Minister Theresa May can start Brexit without a Parliament vote or not, the pound rose to its highest level since December.

Experts are not expecting any significant changes to the value of the pound on Tuesday.

“May has already said that she wants to submit the final Brexit deal to the House of Lords, as well as to the House of Commons,” said James Hughes, Chief Analyst at London’s online broker GKFX, in an exclusive conversation with DW.

“The decision to decide whether Parliament should be involved in the launch of Brexit will therefore not be so important.”

Dramatic crash

Pound Sterling has been on a rollercoaster ride since the result of the referendum confirmed Britain’s withdrawal from the EU, with a downwards underlying trend. Sterling has lost around 20% of its value against the US dollar, and after the pound dipped to 1.20 US dollars last week the world waited for the contents of May’s keynote speech last Tuesday (17.01.17) in the hope of some clarity. While the speech was without some important details, the address restored some optimism and the pound recovered.

Hard Brexit

At last something resembling a plan was visible, even if it wasn’t satisfactory. But May did confirm -against the dreams of Brexit opponents – that Britain could somehow leave the EU but still have access to the single market. Wishful thinking! May bluntly denied access to the single market and the customs union, meaning a so-called hard brexit – a divorce with tears – has become more likely. “Better no deal than a bad deal” May said, but the British economy would undoubtedly suffer with expensive tariffs suddenly slapped on its goods and services.

British stocks rally

Despite all the unknowns, the Brexit decision is yet to do any serious damage and the prophecies of doom are yet to materialize. On paper, the British economy remains strong. In the second half of 2016, there was two percent growth and less than five percent unemployment. The British stock index, the FTSE 100, has even rallied to seven percent above its pre-referendum levels. It’s no wonder, then, that British exports are becoming more competitive due to the decline in foreign exchange rates. In addition, British FTSE companies are generating a large portion of their profits abroad and the weak domestic currency is amplifying the balance. In dollars, FTSE investors have actually made losses. Among the biggest losers though are British consumers; overseas travel and imports are becoming more expensive and rising inflation is diminishing the already stagnant real wages.

No cherry picking

The financial sector would feel the loss of the so-called EU passporting rights, which allows Japanese or American financial institutions to do business all over the EU from their headquarters in London. May intends to negotiate bespoke deals for specific sectors of the UK economy, including finance, aerospace and automotive. These industries are particularly dependent on unbureaucratic goods traffic to maintain their pan-European just-in-time production chains. But experts consider May’s hopes illusory, and this was confirmed by Angela Merkel when she said the British cannot ‘pick the raisons out of the cake’. May’s Brexit Minister David Davis has already admitted that British truck drivers may soon face lengthy customs checks on the French border.

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