Britain's exit could be tough and protracted

Tuesday 04th April 2017 19:37 EDT

Last week British Prime Minister Theresa May triggered Article 50 of the EU's Lisbon Treaty with a formal notification of Britain's intent to leave the bloc on this afternoon, kicking off a two-year period of exit talks. Most analysts said the actual triggering of Article 50 will only have symbolic significance for investors, with the real driver for sterling being how negotiations with the EU will play out, and the health of the British economy going forward. Investors' main fear is that a "hard" Brexit -- one in which Britain would lose preferential access with its largest trading partner -- would damage the British economy, which is showing signs of faltering.

Worries are also growing that Britain's exit negotiations could be tough and protracted, as both Theresa May and European leaders take bold opening stances. Uncertainty surrounding the terms of Britain's exit from the EU continues to weigh on the currency, still down by nearly 20 percent against the dollar since last June's Brexit vote.

The Pound remained relatively stable on the news and throughout Thursdays trading session. In a statement in the Commons, the Prime Minister Theresa May said that the UK has a "unique opportunity to shape a brighter future". She added: "The Article 50 process is now under way and in accordance with the wishes of the British people the United Kingdom is leaving the European Union."

She said Britain would now make it's own decisions and it's own laws, and "take control of the things that matter most to us - we are going to take this opportunity to build a stronger, fairer Britain, a country that our children and grandchildren are proud to call home".

The pound has also come under recent selling pressure as a result of calls for yet another Scottish independence referendum, as investors consider the increased uncertainty posed by a potential breakup of the United Kingdom. The Scottish National Party (SNP) has refused to back down over its demand for a new independence vote, after May said: "Now is not the time". Despite voting to remain in the UK in 2014, the SNP administration wants a fresh vote as the UK plans to leave the European Union. Scottish voters voted by a majority to remain in the EU, with England and Wales voting to leave. Scotland’s First Minister Nicola Sturgeon says she is "up for continued discussion" with May on the matter, and wants to find a referendum date that both sides can agree on.

The Euro strengthened after centrist French presidential candidate Emmanuel Macron's performance in a live television debate boosted the view that he will win the race over the far-right candidate Marine Le Pen. With the French election coming up in April, any news showing less chance of success for anti-EU Le Pen is likely to support the euro, as she has been seen as a major political risk.

Several major banks have abandoned their forecasts for a fall in the euro to below parity with the dollar over the next 6 to 12 months. The main reasons are an expected delay in Trump’s fiscal and tax plans, as well as reduced political risk in the Eurozone.

The Socialist Party said rival candidate Francois Fillon must abandon his campaign to become France’s next president because of the growing list of scandals he’s facing.

Markets reacted positively to the results of the elections in the Netherlands, where the current Dutch Minister Mark Rutte won the most seats, sweeping aside the challenge of anti-EU Geert Wilders. The euro recovered some lost ground, finding further support in the form of the Eurozone’s final inflation figures for February. Eurozone inflation year on year showed a figure of 2%. Focus for investors now turns to elections coming up in France and Germany

As widely expected the US raised interest rates for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank's target.

The rate increase to 1% lead to the Dollar initially weakening as the FOMC did not flag any plan to accelerate the pace of monetary tightening.

The statement said further rate hikes would only be gradual as officials stuck to their outlook for two more rate hikes this year and three in 2018.

The vote to hike rates was one sided with 9 votes for in favour of a hike. Only Neel Kashkari preferred at this meeting to maintain the existing target range for the federal funds rate.

At the end of this week the Dollar lost ground when new US jobless claims rose unexpectedly last week, representing a departure from other data showing a solid labour market.

The US dollar and U.S. long-dated Treasury yields slipped on Monday as investors worried that U.S. President Donald Trump's defeat over healthcare reform could lead to for difficulties delivering other campaign promises, such as fiscal stimulus. If Trump is unable to deliver on these promised expectations surrounding US economic growth and inflation could dissipate leading to a weakening of the dollar.

The dollar steadied after its worst week since U.S. President Donald Trump’s election in November, promises of more rises in Federal Reserve interest rates this year helping it recover from multi-month lows in still shaky global markets.

The index that measures the broader strength of their U.S. counterpart was trading almost half a percent above Monday's four-and-a-half month low but it was up just 0.1 percent on the day after a volatile Asian session.

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