Friday, 6 July 2018

Sterling braces for May's crunch Brexit meeting

LONDON (Reuters) - Sterling inched higher on Friday before a long-awaited meeting where Prime Minister Theresa May will try to convince her ministers to back her policy document on Britain’s future relationship with the European Union.

The meeting, which is set to run into the evening at Chequers, May’s country residence, is a last-ditch appeal to ministers to put Brexit divisions behind them and move forward.

The perceived lack of progress in talks with Brussels over Britain’s exit from the EU in March, 2019, has weighed on the pound this year. Combined with signs of economic weakness, it has pushed the currency to near seven-month lows.

Traders expect volatility in the pound to jump once details of an agreement - or a lack of one - become clear late on Friday.

The risk for May is that a number of ministers might quit if they consider her plan to be a “soft Brexit”, or one that is too similar to Britain’s current relationship with the EU. On the other hand, many analysts expect Brussels will reject her plan.

The first details of May’s new plan for close customs ties with the EU - a “facilitated customs arrangement” - won mixed reviews, with one Brexit campaigner saying it could leave the country out of Europe, but still run by Europe.

“Pound volatility overnight still appears low given the potential for this to spark a period of domestic political uncertainty in the UK,” MUFG strategist Derek Halpenny said. “There is a high risk of some sharper volatility at the start of next week and this risk still appears under-priced.”

The pound rose 0.2 percent to $1.3247 against the dollar in early Friday trading. It traded flat versus the euro at 88.415 pence.

“Reports that pro-Brexit cabinet ministers will ‘behave’ over the coming months is a minor win for the currency,” said Viraj Patel, an analyst at ING who is bullishness on sterling.

“However, for Brexit risks to fully dissipate, the response from EU officials to the UK government’s Brexit plan is what truly matters for pound markets.”

Reference: Tommy Wilkes

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