Shortly after Midday, the British ambassador to the EU, Sir Tim Barrow, is expected to deliver a letter from UK PM Theresa May that will formally begin the UK’s departure from the European Union. The markets are in wait-and-see mode going into the event, with the Pound showing some slight weakness and the FTSE 100 little changed.
Brexit to become a reality
On June the 23rd last year, the UK voted to leave the European Union and just over nine months later this decision will become a reality. There have been a few hiccups along the way regarding the process by which Article 50 can be triggered, but the government has now seemingly met its self-imposed deadline of formally beginning the exit before the end of March. A two-year window will now begin during which the UK and EU will furiously attempt to thrash out the details of the separation before the UK officially leaves the Union. In terms of how the markets have reacted since that momentous day last June, the pound has dropped to its lowest level in several decades whilst the leading UK stock market has soared to all time highs - in large part due to the depreciation in sterling. The question now is how much of Brexit has already been factored in and where next for these markets.
Sell the rumour, buy the news?
As far as today’s events go the markets shouldn’t be caught off guard like they were last summer. This move has long been telegraphed by the government and should come as no form of surprise. Theresa May will address MPs in the Commons later, and this could prove the most market moving event of the day for the pound. With the latest positioning data from last Friday showing record levels of shorts in Sterling, there is some suggestion that we could be in store for a relief rally as there is only so many times the same news can be discounted. Currency traders appear a little cautious going into the event but if May’s rhetoric is upbeat and positive - as it was during her January speech - the pound is ripe for a sharp short covering rally.
The end of the beginning or the beginning of the end?
As far as the long run implications of Brexit are concerned we aren’t really any wiser now than we were at the end of June although the immediate sense of panic and pandemonium has subsided significantly. With key elections this year in France and Germany to come, there remains a lot of uncertainty as to not only what the EU’s objectives will be during discussions, but who the UK will be negotiating with. The road ahead remains long, winding and full of potentially harmful pitfalls but today will at least mark a move off the starting line. Where the UK ends up will ultimately depend on the ability of our dealmakers and the approach adopted by the EU counterparts, who will be toeing a fine line between not wanting to cut off their nose to spite their face in making a deal that is damaging to both parties, whilst also being mindful that too generous an agreement may see other disenchanted nations look to leave the bloc.