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Wednesday, 25 January 2017

Sterling dips after Supreme Court rules on Brexit


Sterling fell and London's FTSE 100 index rose on Tuesday after the Supreme Court ruled that the government must go through parliament, but not the UK's regional assemblies, to trigger talks on leaving the European Union.

The pound jumped to five-week highs after the first sections of the ruling were read, but was then hit by a wave of profit-taking, fuelled partly by investor worries about how politicians and the public in Northern Ireland and Scotland will respond.

The decision overall was seen as clearing the way for Prime Minister Theresa May to get on with launching Brexit talks which investors would rather were not taking place at all, albeit with a handful of procedural hurdles.

"There was the issue of the assemblies and it is a big deal (that they do not have to be consulted). It gives the upper hand to the government," said Stephen Gallo, head of European FX strategy with BMO in London.

"It looks like she will have enough votes to get it (triggering Article 50 divorce talks) through."

There were also hints of more constitutional conflict that could come back to haunt the pound, already down 17 percent against the dollar since June's referendum vote to leave the EU.

Scotland's nationalist First Minister Nicola Sturgeon said she would bring a motion of consent to Edinburgh's devolved chamber despite the ruling that the government did not need to ask for its approval, or that of the Northern Irish equivalent. Voters in both regions rejected Brexit, which was carried to a narrow majority by English and Welsh votes.

Sterling had drawn support last year from the original ruling in London's High Court which was perceived to support pro-EU forces in parliament who are demanding a "softer" Brexit that maintains membership of the bloc's lucrative single market.

But many market participants said the decision on Tuesday had already been factored into sterling.

"The ‘good’ news about greater Parliamentary scrutiny of the Brexit process had already been priced in," said City Index analyst Kathleen Brooks. "Thus, profit taking was to be expected at this stage."

By 1553, sterling was down 0.4 percent to $1.2489. and 86.07 pence per euro.

DATA DRIVE

The pound has fallen from $1.70 in a series of Brexit-driven sell-offs and partial corrections over the past 13 months, and there are many analysts and investors calling for more losses.

Mike Amey, sterling portfolio manager with giant bond investor Pimco, argues the UK economy, which has proved more robust than many economists had expected so far, will weaken in the months ahead.

"Our view is that the pound could still see some further weakness, probably more against the dollar than the euro," he told Reuters Global Markets Forum after the decision on Tuesday.


"We will see a slowdown over 2017. The good news is that the economy has entered 2017 with good momentum. Our base case is that consumer spending slows, but that GDP still holds (at) around 1-1.5 percent over 2017."

Bank of America Merrill Lynch analysts pointed to a profit warning from BT as a hint of how Brexit uncertainty is likely already weighing on business investment decisions and consumer confidence.

Falls for the pound have tended to support internationally-focused companies on London's FTSE 100, which become more competitive and profitable as the currency weakens. That index rose 0.2 percent on the day to 7163.51.

"The court ruling is a slap on the face of the British government," said Jawaid Afsar, senior trader at Securequity.

"However, parliament is likely to give its approval and the Brexit timeline could remain on track. As far as investors are concerned, one more uncertainty is now out of the way and they can focus on other things."

Reference: Reuters UK

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