Sterling Boost as Johnson Gets Behind Transitional Brexit Deal, Sees EU-UK Divergence Further Out

© Andrew Parsons/ i-Images, Flickr, Reproduced under CC Agreement


Brexit is firmly on the agenda for the British Pound after Foreign Secretary Boris Johnson kicked off one a series of speeches that will see government ministers provide more clarity on their decisions about Brexit.

The Pound rose sharply during noon trading Wednesday's after a speech that saw Foreign Secretary Boris Johnson attempt to up the mood surrounding Brexit.

Johnson, one of the most prominent advocates for the UK's exit from the EU, sought to bring together those on both sides of the Brexit divide by making a positive case for the future outside of the European Union.

Wednesday's address is significant in that Brexit angst remains a thorn in the side of Sterling which continues to struggle as we hit hit the mid-point of February.

The Pound-to-Euro exchange rate was quoted at 1.1262, having started the day at 1.1239, the Pound-to-Dollar exchange rate is at 1.3978 having started the day at 1.3883.

It has been pointed out by one analyst that the last time he set out the red lines on a divorce deal GBP/USD fell 0.8% on the day, so market's were certainly on standby heading into the address.

Johnson managed to achieve the opposite in an appearance at the Policy Exchange think-tank Wednesday, where he confirmed the UK's commitment to a transitional period.

"One positive from Boris Johnson's comments - he mentions the need for an implementation period to keep things 'as they are' because it's important for business/consumer 'confidence'. This shows Cabinet understand costs of not putting economy first (ie, not securing transition deal)," says foreign exchange analyst Viraj Patel with ING Bank.

Market focus remains on the issue of the transitional deal after the EU's Michel Barnier sunk the UK currency on February 9 when he said it was not a given.

The transitional deal is important for Sterling as it is the insurance required by businesses and financial markets to ensure chaos is avoided when Brexit tolls in March 2019.

Any notion that a transitional period will not take place almost certainly ensures the UK and EU will default to WTO rules and the process will be messy and disruptive.

There are more Government speakers who will address the media over the coming days: International Trade Secretary Liam Fox, Secretary of State for Exiting the European Union David Davis, David Lidington and Theresa May who will address a conference in Munich on Saturday.

Nerves might remain elevated ahead of these encounters and could explain Sterling's stubborn response.

While Johnson confirmed the Government was to seek a transitional deal he maintained the view that the UK would not seek to be tied to EU rules indifferently.

"If you're going to come out you may as well take advantage of differences," said Johnson.

This confirms the UK's ultimate aim is to leave the single market and customs union which is seen by some as a key source of potential downside for the UK economy and its currency in coming years.

"There is a lack of clarity over the details of the future relationship. Investors view it as unlikely that the UK remains in the single market, yet a sizeable majority believe there is a chance the UK retains passporting rights for financial services. A reversal of Brexit is considered very unlikely, while the proportion of investors expecting a “crash” Brexit scenario has risen slightly," says Sreekala Kochugovindan, an analyst with Barclays commenting on the most recent survey conducted by the bank into investor sentiment pertaining to Brexit.

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