UK PM Theresa May’s position on Brexit: will sterling extend declines? – Forex News PreviewPosted on March 1, 2018 at 4:00 pm GMTAndreas Georgiou, XM Investment Research Desk
More than one-and-a-half-years have passed since Britain voted in favor of leaving the European Union and the situation is still unclear as regards the UK’s future relationship with the remainder of the EU bloc of nations. UK PM Theresa May will be delivering a speech on Friday that aims to clarify her government’s position on this front. Will her remarks though truly clear the fog, or will a fresh layer of uncertainty set in, acting as a drag on both the UK’s growth outlook and Brexit-sensitive sterling?
Numerous key issues pertaining to the UK’s departure from the EU remain unresolved, the primary one being under what terms will the nation continue to trade with the EU. Relating to this, will the UK remain in the EU customs union, and if not then how is a hard border between the Republic of Ireland and Northern Ireland to be avoided? Supposedly, the Irish border issue was solved a few months ago. Many analysts then pointed the obvious, namely that the then solution was a fudge and the problem would resurface, haunting May’s government. Current developments are proving them right.
Moreover, if there’s a transitional period after March 2019, the time the UK is set to officially depart from the EU – at the moment, despite the rhetoric from some hardline Brexiteers, it is hard to envisage a scenario where one such period is not needed – will the UK still be subject to EU laws and regulations during that period?
In the beginning of the week, one might have expected PM May’s speech tomorrow to clear, at least to a significant extent, the uncertainty over Brexit. However, her decision to immediately reject EU officials’ draft Brexit treaty published on Wednesday, might constitute a prelude that her comments could lead to even more differences with her EU counterparts rather than ease tensions.
Pound/dollar lost 1.1% yesterday as concerns over Brexit yet again took center stage. The pair has not been as volatile so far on Thursday, though it still down on the day, having earlier touched a one-and-a-half-month low of 1.3713. Any comments by May that are seen as driving the UK and the EU further apart from striking a Brexit deal are expected to spur a selloff in sterling. The area around the 50% Fibonacci retracement level of the October 6 to January 25 upleg at 1.3689 might act as a first line of support. Given though that current price action is relatively close to this area, as well as the British currency’s extreme sensitivity to Brexit developments, this area might not hold. In case a downside violation indeed takes place, the 61.8% Fibonacci mark at 1.3534 would be eyed next for additional support.
A conciliatory tone by May though, one that is viewed as increasing the odds for a breakthrough in negotiations, is anticipated to be met with long sterling positions. In this scenario, pound/dollar could find resistance around the 38.2% Fibonacci level at 1.3844, including the current level of the 50-day moving average at 1.3822. Stronger advancing would shift the focus to the range around the 23.6% Fibonacci mark at 1.4036, including the 1.40 handle that may be of psychological significance.
Euro/pound which also gained significantly on the back of yesterday’s developments – the implication being that the UK stands to lose much more from a bad Brexit deal than the EU, or for that matter eurozone economies – will of course also be eyed. The pair recorded a near two-week high of 0.8877 during Thursday’s trading.
Whatever the case, May’s hurdles will be far from over after tomorrow’s speech. The opposition Labour party led by Jeremy Corbyn decided earlier in the week to support staying in a customs union with the EU following Brexit, something which is also backed by the Confederation of British Industry (CBI), the nation’s big business lobby. This stands in contrast to what May’s government has decided. In a backlash for the prime minister, reports suggest that the list of conservative MPs that will support an opposition amendment to a trade bill requiring the nation to stay in a customs union with the EU is growing. The split within the Tory party seems to be widening and the country may soon have to face a political crisis. Local elections held in May might prove to be the catalyst for such an outcome should the Conservative party come out weaker, with PM May likely having to come to terms with a fresh leadership challenge. The UK would them have to face uncertainty on two fronts, with the outlook for growth and the British currency getting grimmer than not so long ago.EURGBPGBPUSD
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