May’s Halloween Brexit deal spooks sterling and bonds

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May’s Halloween Brexit deal spooks sterling and bonds

 


Theresa May
Theresa May

In the past, news of delays to Brexit have boosted the pound – but an agreement to extend Article 50 talks until October 31, Halloween, pushed the British currency lower against the euro yesterday.

Sterling fell 0.2pc to 86.28 pence per euro and British government bonds were also weaker as markets digested the European Union extension that averted the immediate threat that Britain would crash out without a deal, but provided few answers about a path to an eventual agreement.

The latest extension, the third granted by the EU, was cut short of initial proposals for a year-end conclusion.

The prospects for any kind of deal are clouded by a likely leadership race in the Conservative party over the summer, with betting odds from Paddy Power assigning a 22pc chance that Theresa May will be ousted in June and 33pc that she will be gone in July.

“If a new Eurosceptic leader is in place, then markets may become more concerned that they could be prepared to take the UK over the cliff-edge. Equally, we could see the EU become more fed-up,” said James Smith, developed markets economist at ING Bank.

“There is a view emerging among some officials that the costs of ‘no deal’ are lower than allowing the UK to stay half-in-half-out for a prolonged period of time.”

ING cut its sterling exchange rate forecast for the third quarter of this year – the period of peak risk for renewed no-deal pressure – to 0.88 pence to the euro from 0.85 pence previously, although its forecasts still anticipate a deal will be reached even if there is a lot of political noise around the process.

So far this year the pound has been buoyant, gaining against the euro in a rally that has eased some of the concerns of pressure on company margins.

“For Irish businesses, the recent rise by the pound has given exporters a reprieve and while the short-term risk of no-deal has reduced, the continued uncertainty means the pound – which has gained as much as 7pc this year already – is unlikely to push ahead without some clear path to a resolution,” said Lee Evans, head of FX trading and strategy, Bank of Ireland.

For those who believe that ending the Brexit risk, one way or another, could unleash investment in the UK economy, the postponement of any decision also means a delay in investment to boost growth, perhaps until late 2020 or early 2021, according to Capital Economics.

If the UK leaves in October with some kind of softer deal, the consultancy expects gross domestic product growth of 1.5pc this year and 1.7pc in 2020, rising to 2.2pc in 2021.

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Airlines EasyJet and Aer Lingus parent International Consolidated Airlines Group rose 4pc-plus on news of the extension which means that Britons will be hitting Europe’s beaches this summer, while holiday company TUI rallied 3.5pc.

Irish Independent

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