May wants a 'clean' Brexit: we expect GBP to remain under pressure in coming months despite today's rally

In her speech today, Prime Minister Theresa May outlined 12 principles for Brexit. In our view, the most important news was that the parliaments will get to vote on the final deal (principle one), which may be a signal that May has accepted the more pro EU parliament must be involved in the negotiation process. This, combined with May's optimism, probably prompted a GBP rally. 

As leaked yesterday afternoon, it was confirmed May aims to leave the EU single market and will not implement a Swiss or Norwegian model. This is the only option that allows the UK to end free movement of people and end the jurisdiction of the EU court (principle four and two, respectively). Instead, the UK wants to make a 'comprehensive, bold and ambitious Free Trade Agreement' not only with the EU (principle eight) but also with the rest of the world (principle nine). Thus, it is also likely that the UK will leave the customs union, which prevents the UK striking free trade deals with other countries (US, Commonwealth, China). 

Theresa May wants 'a smooth, orderly Brexit' (principle 12). Although she wants the UK and EU to reach an agreement within the two years, she thinks it would be in both parties interests to implement the deal in a 'phased process'. 

May echoed Chancellor Philip Hammond by saying that the UK would change its ' economic model ' (lower corporate taxes and deregulate significantly) if the EU tries to punish the UK. 

Overall, Theresa May sounded very optimistic, ambitious and outward looking in her speech. However, we think the negotiations, not only with the EU but also with other countries, are going to be very complicated and may take several years to complete. We are less optimistic and note that May said that no deal is better than a bad deal. We are still waiting for responses from EU leaders, although EU Council President Donald Tusk tweeted, the speech was ' at least a more realistic announcement on Brexit ' and that EU27 is ready 'to negotiate after Art. 50 '. 

The GBP rebounded after May's speech on the Government's Brexit plans, as it did not bring much new to the table. However, uncertainty remains high, as we still expect the GBP to remain under pressure in coming months as the triggering of Article 50 moves closer. Given that Prime Minister May has promised that Parliament will have to vote on the Brexit deal before it can be implemented, the Supreme Court's ruling might be less relevant now, leaving scope for a rebound in GBP now rather than in connection with the Supreme Court ruling. However, May's promise that Parliament will vote on the final deal probably does not remove concerns among the members of parliament that are against Brexit and Scotland's concerns about access to the single market. 

We target EUR/GBP at 0.88 in 3M but stress that the risk is skewed on the upside.

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