Breathing Space for Pound Sterling to Grow

Steve Jarvis, Chief Technical Analyst at TraderMade Systems Ltd sets out his expected timeline for upcoming Brexit negotiations and what it could mean for the Pound.

The Article 50 letter was delivered to the European Council President Donald Tusk at 11:30 GMT on Wednesday to formally start the process for the UK exit from the EU.

Donald Tusk has said that within 48 hours of the UK triggering Article 50, he will present the draft guidelines to the EU council (27 member states).

However, there will be some time before the 27 member states formally agree on the guidelines for talks as each state has different priorities.

In our view, EU council is likely to agree on guidelines around June which will be better for the negotiations on both sides as the French elections will be out of the way.

A Protracted Process

UK-EU negotiations are in uncharted territory with no precedent to guide the two parties since Article 50 has never been invoked before.

However, there are certain areas on which Article 50 is quite clear.

Firstly, the European Commission will negotiate on the behalf of the EU Council, which will need approval from at least 20 member states for an exit agreement.

Secondly, the exiting state (in this case the UK) will cease to be part of the European Union once the exit agreement comes into force or the two-year deadline lapses (since the triggering of Article 50), whichever is soonest.

That said, the two-year deadline can be extended by a unanimous approval of the EU Council provided that the exiting state (UK) agrees.

However, there are strong disagreements between the EU Council and the UK regarding the structure of these negotiations.

Michel Barnier, the Chief EU negotiator, wants to have a two-step approach where he wants to have the divorce of the UK-EU partnership first, followed by the second step where future of the UK trading relationship with the EU is discussed.

The UK wants a parallel approach where the UK future trading partnership with EU and the exit talks will the simultaneously.

From the UK's standpoint, the two-step approach will weaken the UK's leverage as the two-year deadline looms on the horizon.

In our view, the new trade agreement between UK and EU is a complex matter and is likely to extend past the two-year period, whereas UK's exit from the EU as per Article 50 exit agreement may complete in two years.

This means that it is more likely that we will see the two step approach the EU wants rather than the parallel approach the UK wants.

A Huge Sum to Pay

Two key issues stand out in the break-up negotiations: the right of the UK citizens already in the EU and vice versa and the bill that the UK will have to foot when it leaves the EU.

On the issue of UK and EU citizenship, UK will want a cut-off date after which the immigrants from EU will not be considered residents in the UK and vice versa but EU will argue that under EU treaties that cut off date is the day the UK leaves the EU.

On the issue of the divorce bill, UK will be asked to pay around £50B to the EU when leaving the union.

Though this is a huge sum it is not expected to be paid in one go.  

And there also seems to be a disagreement on the exact amount.

PM Theresa May has already said that Britain is prepared to pay the divorce bill and we expect the UK government to take a practical approach to settling their debts.

However, we also expect this to be a thorny issue and Theresa May will need to get something in return in order to justify paying the huge sum.

The Pound has Space to Grow

We expect GBP to improve because the process to negotiate Brexit is a slow one and we don't expect any immediate reaction from the EU over the coming weeks.

On the UK front, the GBP is correcting on risk aversion but given that the UK government has already published its positions in a whitepaper, we don't expect any real impact on GBP from UK side.

For the same reasons, the EUR is also unlikely to be impacted by Brexit news over the short-term as well.

A Tentative Timeline

Even though it's nearly impossible to provide a timeline on talks, this is what we think seems possible: the official negotiations will begin from around June after the French elections and the EU will then want to make a significant progress on exit agreement before the end of 2017 before moving to the new trade agreement around the start of 2018.

However, the German election in September may derail this process.

The final exit agreement may be completed by end of 2018 so that it can be approved by the European Parliament, the UK parliament and the European Council before the expiration of the two-year deadline.

However, the negotiations on the new trade agreement are likely to be extended past the end-of-March 2019 deadline under some transition agreement but these are early days and a lot can happen in between now and then.