Sterling suffers as May’s Brexit speech delivers few details

Sterling has slumped as Prime Minister Theresa May has delivered a speech thin on detail regarding the UK’s exit from the European Union before UK journalists and her cabinet in Italy.

May also reiterated that no deal is better than a bad deal in the Florence speech, which was expected to see May make concessions to push negotiations forward.

She has confirmed financial commitments will be met and requested a transition period, but still failed to address several key points that the EU wants settled before talks to move on to the future EU-UK relationship.

The currency fell half a cent against the US dollar to $1.3532 during the speech.

In a statement released after May’s speech, chief negotiator for the EU Michel Barnier welcomed the Prime Minister’s indication that the UK will respect its existing financial obligations.

But on the issue of a transitional arrangement, Barnier said that can only be discussed once the UK makes progress on issues of EU citizens’ rights and the Irish border. It also must outline its proposed financial settlement in detail.

May’s speech did not commit to a period for the transitional arrangement, but suggested two years could give the UK and EU enough time to establish new infrastructure and processes to deal with the country’s exit from the union. EU citizens would be able to work and live in the UK during that period, but the UK would operate a registration system for them.

Just a day earlier, Barnier had expressed concerns about the Home Office sending deportation letters to citizens and defying High Court orders. He indicated that the EU did not trust the UK to commit to its citizens rights after Brexit and therefore wants the European Court of Justice to oversee the issue.

However, May said she wanted UK courts to play this role, while taking into account the judgments of the ECJ “with a view to ensuring consistent interpretation”.

In addition to agreeing to pay for projects that the UK has already committed to, May requested that the country pay contributions to take part in specific EU policies and programmes within science, education, culture and security.

May said that the UK would no longer directly benefit from the EU’s future trade agreements, although she did not acknowledge that existing trade deals are likely to be renegotiated on Brexit.

‘Few specifics and even fewer surprises’

State Street Global Markets head of macro strategy for EMEA Tim Graf says the speech offered “few specifics and even fewer surprises” with the main takeaway for markets a transitional arrangement of around two years.

“While the pound weakened and UK rates fell during the speech, these moves were quite muted, perhaps an appropriate reaction to a speech carrying very little new information,” says Graf.

Chair of the Brexit select committee Hilary Benn says the recognition the UK needs a transition period is a “small step forward”.

“More worryingly, we still don’t know what will come after the transition. Mrs May ruled out both the Norwegian and Canadian options in favour of a ‘bespoke’ deal.”

Benn notes this is despite the fact Barnier has made clear the EU considers no such option is on the table.

“How does the Prime Minister plan to achieve such a deal when her speech did not provide the detail or certainty that British business desperately needs so it can plan ahead,” Benn says.

Clock is ticking

May’s speech in Florence follows Michel Barnier’s speech in Rome yesterday, where he expressed frustration on progress.

Barnier said there is only one year of negotiations left with little progress made. While the UK will officially become a third country on 29 March 2019, the divorce must be agreed six months earlier to allow time for ratification.

Barnier said of the financial settlement that the matter was a question of trust between the 27 and the United Kingdom, based on the respect of one’s signature. “And everyone knows that we will need this trust to create a solid relationship in the future,” Barnier said.

He pointed out that if the UK wanted a relationship closer than that just agreed with Canada there was an option to use Norway or Iceland as models to be in the single market, accept rules and contribute financially.

However, May ruled out both the EEA and an FTA like that agreed with Canada in her speech today.

“The question facing us over the coming months is serious, but simple: will the United Kingdom leave in an orderly fashion with an agreement, or not?”

Barnier concluded his speech by stating the future of the Union is their priority, not Brexit.