UK: PM May plans to invoke Article 50 by Q1 2017 - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has weakened modestly overnight following comments from UK Prime Minister May at the Conservative Party conference at which she provided a little further clarity over the Brexit process.

Key Quotes

“PM May confirmed that “there will be no unnecessary delays in invoking Article 50. We will invoke it when we are ready, and we will be ready soon. We will invoke Article 50 no later than the end of March next year”. The planned timing for invoking Article 50 is consistent with recent press speculation and is unlikely to be a surprise to the market. It will help to provide some much needed certainty for businesses and it is a relief that the process will not drag on for too long. The UK could have left the EU by 2019 before the next general election which is scheduled to take place on the 7th May 2020.

It was announced as well that the government will introduce a Great Repeal bill in the Queen’s Speech next year, which will enshrine all existing EU law into British law. EU law will then no longer override domestic legislation. The bill will work by repealing the 1972 European Communities Act, and will take effect at the point of Brexit. Once Brexit has been completed, the UK parliament will be able to keep, amend or cancel any legislation, and it will end the jurisdiction of the European Court of Justice in the UK.

However, it still remains unclear what exactly Brexit will mean for the UK outside of the EU as Theresa May chose not to expand much beyond “Brexit means Brexit”. In her speech she stated that there is “no such thing as a choice between “soft Brexit” and “hard Brexit”. This line of argument – in which “soft Brexit” amount to some form of continued EU membership and “hard Brexit” is a conscious decision to reject trade with Europe – is simply a false dichotomy….propagated by people who, I am afraid to say, have still not accepted the result of the referendum”.

It still appears likely that the UK government will chose to leave the EU single market but will attempt to reach a mutually beneficial bespoke trade agreement on trade and finance. PM May’s comment that “we will do what independent, sovereign countries do. We will decide for ourselves how we control immigration, and we will be free to pass our own laws” do not appear consistent with a desire to remain in the single market. However, she also wanted to give “British companies’ the maximum freedom to trade and operate in the single market”. PM May hopes to hold informal negotiations with the EU before Article 50 is triggered.

The comments from PM May have triggered fresh pound selling highlighting that market participants remain wary that leaving the single market will leave the UK worse off and potentially require an even weaker pound to support the adjustment, although it remains to been how successful the UK government will be at securing a trade deal with the EU to help dampen those concerns. So far there is little clear evidence that the performance of the UK economy has been impacted negatively by heightened Brexit uncertainty both before and initially following the referendum. The latest UK GDP report released on Friday revealed that economic growth even accelerated solidly by 0.7% in Q2, and service activity remained solid in July. The UK economic data continues to defy the gloomy predictions ahead of the Brexit vote.

As a result, it is becoming more difficult for the BoE to justify providing further monetary easing as soon as at their next meeting in November. At their last meeting the majority of MPC members still thought that it likely would be necessary to lower rates close to 0% by year end which is one reason why the pound is failing to derive much support from the recent stronger UK economic data. We continue to believe that if economic growth is revised higher in their November QIR then the BoE should refrain from further monetary easing until a later date if required, which could offer more support for the pound in the near-term. In contrast, if the BoE remains trigger happy then it will reinforce pound weakness.”