PM May's conciliatory speech eases Hard-Brexit fears in the near-term - MUFG

Lee Hardman, Currency Analyst at MUFG, shared important comments regarding Prime Minister May’s Brexit strategy. 

Key Quotes

"UK Prime Minister May made a good speech in our view which was very conciliatory in tone and even promised parliament a vote on the final Brexit deal. The speech is helping to ease fears in the near-term over a “hard” and more disruptive Brexit adjustment. The key aims of the UK government make a lot of sense to us and are broadly in line with our expectations for the UK’s Brexit plan. The government soundly realises it would be an impossible task to remain a full-member of the single market, and instead will aim to strike a bold and comprehensive free trade agreement with the EU. The “cleaner” Brexit plan should help to smooth the Brexit negotiations."

"The government hopes that the free trade agreement could maintain the greatest possible access to the EU which may take in some elements of the single market. It is even willing to continue paying into the EU budget to maintain the greatest possible access. It also hopes to strike a bespoke agreement to remain part of the customs union. However, a new customs union agreement has to allow the UK to strike its own trade agreements with non-EU countries." 

"Further reassurance has been provided by the government’s signal that it wants a transitional phase which would help to limit any initial Brexit disruption. Overall, the government has put forward an ambitious Brexit plan while acknowledging that negotiations with the EU will involve compromises. It remains to be seen how much of their plan that the UK government will be able to achieve. We remain hopeful that the UK and EU will both find it in their best interests to maintain favourable terms of trade and seek to dampen any disruption."

"In light of the update on the UK government’s Brexit plans, we have decided to leave our outlook for the pound unchanged for the year ahead. The plans were broadly in line with our expectations and have failed to trigger another adjustment lower for the pound. “Hard“ Brexit concerns may have just peaked in the near-term. We continue to believe that the bulk of the adjustment lower for the pound in response to Brexit concerns has already taken place which leaves the pound undervalued."

"The main downside risk for the pound going forward is that the negotiations between the UK and EU could break down thereby increasing the likelihood of a more disorderly Brexit. However, we doubt that talks could break down as early as this year. The conciliatory tone of the UK government’s comments and plan for a “cleaner” Brexit have further dampened the risk of a more disorderly Brexit."

Sterling will probably not hold the gain for long