The Costs of a Brexit Are Rapidly Rising
The Road Less Traveled – Britain Post-Brexit
Clear instructions have been issued by the European Court of Justice (ECJ) vis-à-vis a hard Brexit and any future trade deals between the EU and Britain. With the likelihood of a soft Brexit diminishing all the time, the highest regulatory authorities in Europe have sent clear instructions to some 38 regional and national parliaments. The gist of the memorandum is as follows: they can veto any future trade deals with the UK. This makes the possibility of an expedited solution to the Brexit saga far less likely. This extension of veto rights is an important addendum to the mix.
According to the numbers, some 50% + of EU businesses will be severing their relationships with UK suppliers post-Brexit. The same holds true of companies in the UK and their European partners. This disruption to the supply chain is going to have dramatic repercussions for the broader economy and will invariably affect the GBP/EUR, GBP/USD, and EUR/USD pairs accordingly. The UK government is feverishly trying to cobble together a majority in parliament by rallying support for the Tories ahead of the general election. A majority will allow the government to speak with greater authority, but it does nothing to assuage concerns with European trading partners.
UK Inflation Figures Rising Fast
2017 is the year that UK inflation has started to rise sharply. Already, consumer price inflation is expected to hit 2.6% for the year through April, up from 2.3% the month before that. This is largely due to rising energy costs, and airfare increases are evidence of that. Major UK companies such as GlaxoSmithKline are in the midst of brokering deals to shore up their investments internationally. The £8 billion expansion of GSK with Novartis of Switzerland is one of the most anticipated buyouts on the FTSE 100 index. Meanwhile, there are significant political headwinds expected in general elections in Italy, Germany, and Spain. The dramatic election victory of French president Macron has sent an unambiguous message to investors that European countries see value in the European Union.
How is the GBP Performing and What Effect is it Having on the FTSE 100 Index?
On Super Thursday, the Bank of England decided to hold interest rates steady. This means that UK interest rates will remain at a historically low rate of 0.25%, and quantitative easing (asset purchases) of £435 billion will continue for now. The Bank of England decision is an important one, since it underscores the near unanimity in the MPC (Monetary Policy Committee). The members voted 7-1 in favour of unchanged interest rates. The BOE governor, Mark Carney largely ignored rising inflation in the UK and preferred to continue QE policies to prevent the UK economy from contracting. Since the GBP started declining, inflation has been rising; this is the strongest inflation rate increase since 2014, with the latest inflation reading at 2.3%. The BOE anticipates an inflation reading of 3% in Q4 2017.
It should be remembered that the BOE outlined that it could not protect the UK economy from all ravages of a Brexit. The UK will need to forge new relationships with its European trading partners and others around the world. That is the only way to stabilize and strengthen the GBP. Currently, the FTSE 100 index is rallying on the back of GBP weakness. The inverse relationship between the two ensures that when the GBP weakens, companies on the FTSE 100 will generate larger profits with repatriated earnings. Currently, the FTSE 100 index is trading at 7,435.39, up 0.66%.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.