UK: What to believe?

Last night the UK’s telegraph reported that PM May’s cabinet has approved a ‘backstop’ plan to stay in the EU’s customs’ union beyond 2021 as the UK government plans regarding the country’s future trading arrangement with the EU remain mired by confusion and the better tone in the pound that emerged overnight, has been cut short this morning, according to analysts at Rabobank.

Key Quotes

“In contrast to the position of the Labour opposition, PM May does not want to remain in the customs union post Brexit. Instead she has requested that her ministers work on two proposals.”

“he first is a customs partnership in which the UK would collect tariffs for the EU at its borders. The second, known as the ‘max fac’ plan, is a streamlined customs arrangement which would use technology at the border to maintain trade flows. The UK has officially proposed that after Brexit starts in March 2019 a transition phase will be in place until December 2020. At this stage the government is expecting to be able to sign and implement international trade deals of its own making.”

“This morning conflicting headlines will serve to underpin the impression of a lack of coordination within the PM’s cabinet. Not only must May bridge the gap between her deeply divided cabinet but she must resolve the seemingly impossible N. Ireland puzzle. Although May wants to be out of the customs union, she has made a strong commitment to the government of Ireland that there will be no hard border and has promised the DUP, on which she relies for support in parliament, that the border will not be shifted into the sea.”

“If PM May fails to lay out a convincing solution regarding an alternative to the customs union ahead of the EU’s June summit, political uncertainty is likely to weigh on the pound. While it is our central assumption that a trade agreement will be in place by March 2019, clearly there are risks to this view. Given that time is running short we see scope for EUR/GBP to push towards the 0.90 area on a 3-6 mth view. Supporting this view is recent poorer UK economic data and scepticism regarding the pace of BoE rate hikes going forward. Our expectation that EUR/GBP will fall around March 2019 is based on the assumption of a trade deal being in place.”

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