Sterling initially dropped sharply and stocks, conversely, jumped higher after UK prime minister Theresa May gave a speech in Florence today purportedly setting out her vision of how the UK will leave the EU.
The PM said the Brexit negotiations ahead would be challenging, but it was in the interests of both sides that they succeeded. She said she is looking for a new and bold partnership and added that a Canada style model or EEA (European economic area) deal would not cut it.
Neil Wilson, senior market analyst at ETX Capital called the speech a "bit of a dud". He said it was "as expected, a bit opaque, thin of detail and offered no new fundamental direction."
The analyst added: “Officially the government is now advocating a transition period, and that the UK will keep paying its subs, but this had all largely taken as read. The key difference seems to be that Britain is no longer pushing for a bespoke transition deal, which ultimately kicks Brexit down the road by two more years, but it also is more likely to be acceptable to the EU and suggests we will see a smoother exit and this ultimately may prove positive for sterling.”
Sterling slid to session lows, with cable - sterling/US dollar - dropping nearly a cent to under US$1.35 as the market decided at first that the speech moved negotiations no further forward.
Once May stopped talking, however, the pound bounced back to $1.356, trading almost flat on the day.
Wilson said: “What’s interesting and why perhaps the pound is now recovering firmly is that the UK now seems to be heading for Brexit not in 2019, but in 2021.”
He added: “If the UK retains single market and pays its bills until then, arguably, it’s Brexit in name only. The shift should placate the softer Brexit voices in the cabinet to some extent and may help spur further sterling gains.“
A time of 'implementation"
A key takeaway from the speech was the much-flagged transition period, which May called a time of 'implementation" after the official date the UK is due to leave on March 29, 2019.
This, she said, would reassure people and businesses that there would be no harsh end to the UK's membership.
During this period, the UK would still have access to the single market, and there would be some kind of regisitration period on the immigration side.
However, the Prime Minister did reiterate what she had said in her Lancaster House speech earlier in the year, that exiting the EU did mean leaving the single market and the customs union.
During the implementation phase, the UK would honour its financial commitments to the EU while it was a member and in-line with budgets already set out, she added.
A figure was not given, but this was taken as a clear hint that the Government would be willing to pay up to €20bn into the EU's budget during this period.
Neil Wilson said: “If the UK retains single market and pays its bills until then, arguably, it’s Brexit in name only. The shift should placate the softer Brexit voices in the cabinet to some extent and may help spur further sterling gains.
“What remains to be seen is how amenable the EU is to such an arrangement citizens’ rights and free movement will be key here. It’s also unclear whether this will wash with the harder Brexit camp in the Tory party.”