Think Again, it's a Harder Brexit and Weaker Pound Sterling on a Bigger Conservative Majority says one Analyst

Modified: Wednesday, 03 May 2017 09:37 BST

Pound Sterling rallied strongly after the Prime Minister announced a snap general election in June.

Investors decided it would be positive for the economy as it would provide a foundation of political stability and that it would also help in negotiating a better Brexit deal for the UK.

The thinking goes that a sizeable majority in parliament would allow Theresa May and her negotiators to arrive at an optimal Brexit that is not subject to the demands of that parliamentary constituency that is seeking an all-out 'hard Brexit'.

Polls strongly suggest that Theresa May will gain a much greater majority than the 16 seats she currently has, with some polls suggesting she will gain over 100.

The most marginal 100 seats are mostly pro-Leave rather than Remain, further increasing the odds of a Conservative landslide.

The thinking so far has been that a large majority, of over 50, would give the government a stronger mandate to negotiate a softer Brexit as it would allow them to ignore the small clique of Eurosceptics in the party which can currently hold the government to ransom unless they get their way.

Think Again

This argument, however, is invalid, according to UBS strategist John Wraith who says that a larger majority will actually be more likely to result in a harder not a softer Brexit deal.

One primary reason is that it would not only weaken the grip of the Eurosceptics within the Tory party but it would also, “weaken the ability of pro-EU advocates,” in parliament from all parties but mainly the minority parties to influence negotiations on Brexit, said Wraith.

Nor does Wraith see a larger conservative majority as helping to agree an early transition deal which would protect UK exporters during negotiations

“On balance, we expect any transitional deal to only be agreed very late in the two-year exit process, and see the Election resulting in an even higher probability of the UK exiting both the Single Market and the Customs Union,” says Wraith in a note dated May 3.

With little give in the hard ‘red lines’ of Theresa May’s negotiation strategy, Wraith fails to see how a greater Conservative majority will help achieve a softer Brexit.

These lines include an insistence on controlling and cutting immigration which goes against freedom of movement, one of the founding principles of the EU, and her insistence on Britain being able to agree bilateral trade agreements separately from the EU.

Wraith sees no chance of the EU ever agreeing these and the UK, therefore, ending up in a hard Brexit fall out of the Single Market and the Customs Union.

“As Theresa May continues to commit to a strict limit on future immigration (and,therefore, acknowledges exit from the EU Single Market is a necessity), and that the Government absolutely intends to negotiate extra-EU, bilateral trade agreements in the future (and must therefore leave the Customs Union), it seems to us that a so-called hard Brexit remains highly likely,” said Wraith.

Rising Temperatures, but Keep a Cool Head

The heat surrounding Brexit is certainly rising with both sides trading barbs.

Of course there was the infamous dinner between Theresa May and Jean-Claude Junker in which Junker walked away suggesting May has no clue as to what the upcoming trade negotiations are likely to embody.

Interestingly, it looks to be Junker's credibility that suffered with some influential European figures suggesting the leaks regarding the meeting are unhelpful.

Latest headlines concern the much-contested divorce bill which the Financial Times believes might now be close to £100bn.

The UK has dismissed this with Brexit Secretary David Davis saying there is no legally-binding requirement to pay such a figure. Indeed, some of have suggested that the European officials are trying to blackmail the UK over the agreement of a free trade deal.

The European budget will attest to how desperate European Union finances will become without the UK's contribution.

BUT - remember none of this is official and only once negotiations are underway do we expect any kind of currency-moving news.

For now, it is all mere posturing and politics.

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