Partner Center Find a Broker

Hello, forex friends! Theresa May gave a major speech yesterday, outlining her plans for the U.K.’s relationship with the E.U., as well as her Brexit goals.

If you somehow missed Theresa May’s speech, then here are her 12 Brexit objectives, as well as the 6 key takeaways that you should know about (scroll down for the latter).

The 12 Objectives

The 6 Key Takeaways

From the above 12 objectives, 1, 8, 9, and 12 are of particular interest to forex traders. And here are the key takeaways from ’em and the other parts of Theresa May’s speech.

  1. The U.K. is leaving the E.U., but…
  2. Parliament gets to vote on the final Brexit deal
  3. The U.K. is leaving the E.U. Single Market
  4. The U.K. will renegotiate the E.U. Customs Union
  5. No plans for a transitional deal
  6. Don’t mess with the U.K. or else…

As for details…

1. The U.K. is leaving the E.U., but…

In her message to the rest of Europe, the British PM said that “We are leaving the European Union, but we are not leaving Europe.”

She clarified by saying that the U.K. does not want “partial membership of the European Union, associate membership of the European Union, or anything that leaves [the U.K.] half-in, half-out.” In short, there would be clean break from the E.U.

However, “It remains overwhelmingly and compellingly in Britain’s national interest that the E.U. should succeed.” Theresa May then extended her hand in friendship, saying that the U.K.’s decision to leave the E.U. “represents no desire to become more distant to you [the E.U.], our friends and neighbors. It was no attempt to do harm to the E.U. itself or to any of its remaining member states.

She then promised that the U.K. “will continue to be reliable partners, willing allies and close friends.”

2. Parliament gets to vote on the final Brexit deal

Theresa May’s first objective is to provide certainty, because she knows “how important it is to provide business, the public sector, and everybody with as much certainty as possible as we move through the [Brexit negotiation] process.” As such, she and her government would “provide certainty wherever [they] can.”

And to that end, May finally put an end to uncertainty on how the end game will play out by announcing the following:

I can confirm today that the Government will put the final deal that is agreed between the U.K. and the E.U. to a vote in both Houses of Parliament, before it comes into force.”

Through this announcement, Theresa May effectively preempts any potential legal challenge, thereby eliminating a future source of uncertainty. This also gives anti-Brexit MPs a chance to meddle with or even stop a Brexit deal that’s too unfavorable for their taste.

3. The U.K. is leaving the E.U. Single Market

Theresa May proposes that a free trade agreement would better serve the U.K. And to drive home the fact the the U.K. is leaving the single market, May said the following:

But I want to be clear. What I am proposing cannot mean membership of the E.U.’s Single Market.”

The PM reasoned that European leaders, such as Angela Merkel, have been clear in stating that the U.K. needs to comply with the “four freedoms” in order to have access to the E.U. single market post-Brexit.

The problem is that one of these “four freedoms” is the freedom of movement of people, which is against the U.K.’s desire to take back control of its borders in order to stem unwanted immigration.

And besides, “being out of the EU but a member of the Single Market would mean complying with the EU’s rules and regulations that implement those freedoms, without having a vote on what those rules and regulations are.” This “would, to all intents and purposes, mean not leaving the E.U. at all.”

As such, the U.K. does not seek membership in the Single Market. Instead, the U.K. seeks “the greatest possible access to it [the Single Market] through a new, comprehensive, bold, and ambitious Free Trade Agreement.”

Finally, May gave the E.U. a little parting shot by saying that “And because we will no longer be members of the Single Market, we will not be required to contribute huge sums to the E.U. budget.”

Anyhow, through this clear announcement, Theresa May finally puts an end to uncertainty on whether or not she plans to leave the E.U. single market.

4. The U.K. will renegotiate the E.U. Customs Union

Theresa May envisions “a truly Global Britain,” which is why the U.K. must also be “free to strike trade agreements with countries from outside the European Union.” However, “full Customs Union membership prevents us from negotiating our own comprehensive trade deals.”

As such, Theresa May vows to renegotiate the Customs Union, particularly the provisions for the Common Commercial Policy and the Common External Tariff.

As to what the PM plans for the U.K., May admitted that she has no idea yet and that it could mean “[reaching] a completely new customs agreement, [becoming] an associate member of the Customs Union in some way, or [remaining] a signatory to some elements of it.”

For those who are not familiar with the E.U. Customs Union, it’s basically an agreement between E.U. members to charge the same import duties on non-members.

It also ensures free movement of goods between member states and gives the E.U., not its member states, the authority to negotiate on behalf of all members.

Unlike the Single Market, however, it has no provisions for the free movement of capital or people. And it is possible to have a limited Customs Union with the E.U. while not being a member of the E.U. or the Single Market.

The prime example of this is Turkey. It’s not a member of the E.U. and it’s not a member of the Single Market, but it is a member of the E.U. Customs Union, with a limited agreement that only covers industrial and processed agricultural goods.

Anyhow, this has no immediate impact until and unless the U.K. renegotiates its Custom Union membership. However, if negotiations are successful, then the U.K. would have access to the E.U.

Single Market and it would also be free to trade with the rest of the world on its own terms, which is gonna be awesome. Conversely, if negotiations fail and the U.K. is kicked out of both the Customs Union and the Single Market, then the U.K. and the E.U. can play a good ole’ fashioned trade war by slapping punitive tariffs against each other.

5. No plans for a transitional deal

Regarding a transitional deal while Brexit negotiations are underway, Theresa May said that she does not want that because it is not in the interest of the U.K. and the E.U. to be “stuck forever in some kind of permanent political purgatory.” Instead, she wants to have a deal hammered out “by the time the two-year Article 50 process has concluded.”

However, the PM acknowledges that “it is in no one’s interests for there to be a cliff-edge for business or a threat to stability.” As such, she proposes that both the U.K. and the E.U. adopt a “phased process of implementation” to allow institutions and businesses some time to adapt to a Brexit deal.

I guess that’s also another source of uncertainty out of the way. Although it remains to be seen if the E.U. would agree to May’s proposed “phased process of implementation.”

6. Don’t mess with the U.K. or else…

In the final part of her speech, Theresa May went on a rather impressive “you need us more than we need you” tirade.

Keep Calm

Here, I’ll just leave this here without comments (emphasis mine):

“Britain wants to remain a good friend and neighbor to Europe. Yet I know there are some voices calling for a punitive deal that punishes Britain and discourages other countries from taking the same path. That would be an act of calamitous self-harm for the countries of Europe. And it would not be the act of a friend.”

“Britain would not – indeed we could not – accept such an approach. And while I am confident that this scenario need never arise – while I am sure a positive agreement can be reached – I am equally clear that no deal for Britain is better than a bad deal for Britain.”

“And – if we were excluded from accessing the Single Market – we would be free to change the basis of Britain’s economic model. But for the E.U., it would mean new barriers to trade with one of the biggest economies in the world. It would jeopardise investments in Britain by E.U. companies worth more than half a trillion pounds. It would mean a loss of access for European firms to the financial services of the City of London. It would risk exports from the E.U. to Britain worth around £290 billion every year. And it would disrupt the sophisticated and integrated supply chains upon which many E.U. companies rely.”

“Important sectors of the E.U. economy would also suffer. We are a crucial – profitable – export market for Europe’s automotive industry, as well as sectors including energy, food, and drink, chemicals, pharmaceuticals, and agriculture. These sectors employ millions of people around Europe. And I do not believe that the E.U.’s leaders will seriously tell German exporters, French farmers, Spanish fishermen, the young unemployed of the Euro Zone, and millions of others, that they want to make them poorer, just to punish Britain and make a political point.”

Final Thoughts

Theresa May’s speech was already the subject of intense speculation over the weekend, especially rumors that she will set the course for a so-called “hard” Brexit, which is why pound pairs gapped lower when the trading week opened.

However, media outlets like The Telegraph leaked parts of Theresa May’s speech, including leaving both the E.U.  Single Market and Customs Union, several hours before the actual speech started, and pound shorts apparently used that as pretext to take some profits off the table, causing the pound to rise.

And as Pip Diddy noted in his recap for the Tuesday morning London session, the U.K.’s CPI reading was actually pretty good, which likely generated actual demand for the pound before Theresa May’s speech.

GBP/USD 1-hour Forex Chart
GBP/USD 1-hour Forex Chart

Anyhow, the leaked speech turned out to be genuine, and so a “sell the rumor, buy the news” scenario played out, sending the pound higher. However, Theresa May did eliminate outstanding sources of uncertainty, as well as a potential source of future uncertainty by giving Parliament a say in the final Brexit deal, so the pound very likely got a lift from actual demand as well, and not just short covering.