Hello, forex friends!
The pound rallied hard on Monday, only to retreat on Tuesday.
And if you’ve been wondering what that was all about, then read up on the two recent Brexit-related events that you should know about.
1. Theresa May’s Speech
U.K. Prime Minister Theresa May gave a speech to the Confederation of British Industry (CBI) on Monday, and the pound rose during and after her speech.
Oh, to those who don’t know, the CBI is, according to the official CBI website, a business organization that “speaks on behalf of 190,000 businesses of all sizes and sectors. Together they employ nearly 7 million people, about one-third of the private sector-employed workforce” in the United Kingdom.
With that out of the way, what did Theresa May have to say? Hey! That rhymes!
On Fiscal Policy
May started her talk by heaping praises on the U.K. economy and then pointing out key weaknesses. She then said that “while the UK’s recovery since the financial crisis has been one of the strongest in the G7, our productivity is still too low.” In order to alleviate this, May established a new department tasked with developing a “modern Industrial Strategy” as one of her first acts as Prime Minister.
To support this “modern Industrial Strategy,” May said during her speech that her government will invest “an extra £2 billion a year by the end of this Parliament to help put post-Brexit Britain at the cutting edge of science and tech.”
Another item that touched on fiscal policy was May’s statement on taxation, namely the following:
“And we will also review the support we give innovative firms through the tax system.”
“Now we want to go further, and look at how we can make our support even more effective – because my aim is not simply for the UK to have the lowest corporate tax rate in the G20, but also a tax system that is profoundly pro-innovation.”
To put this in perspective, the U.K. is set to cut its corporate tax rate from 20% to around 17% by April 1, 2020. However, U.S. President-Elect Trump’s tax plan is to cut business tax from 35% to 15%, which is obviously much lower. May is therefore hinting that she could cut taxes lower still.
With regard to Brexit, May presented an optimistic face by saying that while “leaving the European Union creates uncertainty for business … there are opportunities too.” She then renewed her pledge to “strike a deal that’s right for Britain and right for the rest of Europe too.”
After that, May reiterated that she wants to trigger Article 50 of the TEU “before the end of March next year” in order to start the negotiation process for an actual Brexit. She then added that she will try to get a transitional deal so that businesses and individuals “can plan with certainty” rather than going off a “cliff edge“. Overall, a very upbeat speech that tries to reassure businesses, so it’s no wonder why the pound got bid up.
2. Brexit Negotiators Meet
The pound later succumbed to bearish pressure on Tuesday, even though positive economic reports were released. So, what happened?
Well, top U.K. Brexit negotiator David Davis and his E.U. counterparts, Guy Verhofstadt and Manfred Weber, had a little pre-negotiations powwow to discuss the procedure.
Both sides apparently agreed that “Brexit needs to be finished by next EU elections,” so there is a “window of more or less 14 or 15 months” in order to negotiate an actual Brexit. And while Davis described the meeting as a “good start,” his E.U. counterparts were hinting at something else entirely.
To be more specific, Verhofstadt had this to say (emphasis mine):
“It is impossible to find Brexit solutions where we destroy the four freedoms. These four freedoms are key, they are a basic element of the European Union: the freedom of movement of goods, services, capital and of people. We will certainly never accept whatever development where these four freedoms at put at risk.”
To put Verhofstadt’s statements into context, one of the conditions demanded by the U.K. before the Brexit referendum was to get back control of its borders in order to clamp down on immigration from other E.U. members.
Quite obviously, this goes against the E.U.’s principle of “free movement” of people. This, therefore, implies that Verhofstadt is planning to drive a hard bargain with regard to a special deal granting the U.K. easy access to the single market.
Moving on, Verhofstadt’s words were actually rather subtle when compared to Weber’s openly hostile statements. Here are a couple of examples, courtesy of Reuters:
“So I must stress again: Brexit means Brexit, that means leaving the European Union, that means cutting off relations … and not cherry picking, not special relationships.”
“I see a British government that keeps saying where it wants to cooperate closely and not how it wants to leave the European Union.”
Anyhow, such, uh, “colorful” rhetoric very likely renewed fears of a so-called “hard” Brexit, which is likely why the pound got crushed.