New research from Danske Bank Markets
Prime Minister Theresa May said that the UK will trigger Article 50 'before the end of March' next year, implying that the UK will officially leave the EU in April 2019. May hinted that she wants to start informal negotiations before but Donald Tusk, the EU council President, refused this implicitly on Twitter .
In connection with the Queen's next speech, May will introduce a Great Repeal Act to remove the European Communities Act from 1972 (stating that EU laws have primacy over UK laws). The new act will convert all existing EU laws into UK laws when the UK officially leaves the EU. The idea is that this should reduce uncertainty and that the UK can remove or change laws afterwards. The act will also end the jurisdiction of the EU court.
It seems as if we are heading for a 'hard Brexit', as Theresa May revealed that control of immigration is the most important issue. She said that the UK is 'not leaving the EU only to give up control of immigration again'. Interpreted literally, this implies the UK leaving the single market, as EU leaders have said that access to the single market means that the UK has to accept free movement of labour.
This is likely to imply that UK financial institutions would lose the current passport access to the European internal market for financial services.
Today's news supports our view that EUR/GBP will move higher as markets begin to price in political uncertainty, especially now as it seems as if we are heading towards a 'hard Brexit'. In our view, the terms on which the UK withdraws from the EU will mitigate capital inflows to the country via the very large current account deficit. This could dominate the positive effect of the recent better-than-expected economic data, which could challenge market expectations of another Bank of England rate cut. As a result, we still expect EUR/GBP to edge higher and forecast the cross at 0.92 in 6M.
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