EU leaders to meet 4-6 weeks later
The UK government announced today that PM Theresa May intends to trigger Article 50 on Wednesday 29 March, which starts the formal Brexit process. This is in line with expectations after May got her green light to start the Brexit negotiations last week, see also Brexit Monitor #25, 14 March. At the same time, the government ruled out an early general election.
Donald Tusk tweeted afterwards that ‘within 48 hours of the UK triggering Article 50, I will present the draft #Brexit guidelines to the EU27 Member States’. The EU council is expected to meet 4-6 weeks later to discuss and adopt Brexit guidelines (according to EU sources it is too early to discuss the Brexit guidelines at the EU council meeting on 6-7 April). It seems likely the EU leaders will wait to meet until after the second round of the French presidential election on 7 May.
As the UK wants to control EU immigration, we are heading for a so-called ‘hard Brexit’ with the UK leaving the single market, see also Theresa May’s 12 Brexit principles in Brexit Monitor #21, 17 January. Eventually we think the EU and the UK will reach a deal corresponding to the EU-Canada deal (possibly slightly more comprehensive given the bigger trade volume between the UK and EU).
The triggering of Article 50 starts the formal Brexit negotiations. However, given that we do not know the future EU leadership (the political leaders of France and Germany), actual negotiations may have to wait until after the German election in the autumn. Also we will likely have some negotiations about how to negotiate to begin with, as the EU wants to settle the divorce bill (which it says could be as high as EUR60bn) before discussing the future relationship while the UK government wants to discuss the two things simultaneously.
GBP depreciated only slightly after the announcement, as markets were already expecting the UK to formally trigger Article 50 next week. We still see potential for further GBP weakness in the near term and after the triggering of Article 50. We target EUR/GBP at 0.88 in 1M and 0.87 in 3M but stress that the risk is skewed on the upside relative to our forecasts. For more see FX Forecast Update: Approaching a base in EUR/USD, 17 March.
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