Financial Services

Sterling slips ahead of EU response to Brexit

Signs the UK economy is slowing as Britain enters negotiating period

The pound was 0.1 per cent lower at $1.2450 in London morning trade

Fri Mar 31 2017 - 09:15

Sterling slipped against the dollar on Friday, as investors readied for the European Union’s official response to Britain’s letter of exit from the bloc, as well the final verdict on Britain’s economic output last year.

European Council president Donald Tusk will send leaders of the other 27 member states his proposed negotiating guidelines for Brexit talks before presenting the main points in Malta two days after British prime minister Theresa May formally triggered the two-year withdrawal process.

Meanwhile, revisions to fourth quarter UK gross domestic product are expected, giving investors a final snapshot of Britain’s economic performance in 2016 following last June’s Brexit vote.

Both events will be watched by investors as Britain gears up for what could be a tough period of political jousting with the European Union over the terms of its exit.

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The pound was 0.1 per cent lower at $1.2450 in London morning trade.

It was 0.2 per cent lower at 85.73p per euro.

“I think we can assume the initial [EU] response is going to imply . . . the costs of the divorce bill need to be settled first, perhaps at least in principle,” said Jeremy Stretch, currency strategist at CIBC World Markets.

“As a realisation that that’s the first point of contention between the two sides (Britain and the EU), then that might be just a cautious reason to suggest that sterling may soften a little this morning.”

Political uncertainty surrounding Brexit and signs the UK economy is slowing as Britain enters a negotiating period with the EU have seen investors take net short positions on the pound versus the dollar to record highs.

British house prices fell in March for the first time since mid-2015, mortgage lender Nationwide said, adding to signs that households are turning more cautious.

And separate data showed British consumer morale steadied in March but households remain downbeat about the outlook for the economy.

Credit Agricole strategists said there was limited potential for a surprise in Friday’s revised UK GDP numbers.

“In any case such data is backward looking and will not have any major impact on monetary policy expectations and/or the currency. We stay of the view that sterling is a sell on rallies within the last few months’ trading range,” they wrote in a note to clients.

Investors are also contemplating the risk of a broader breakup of the United Kingdom. Scottish first minister Nicola Sturgeon has written to Ms May formally demanding that she allow a second referendum to be held on Scottish independence ahead of the United Kingdom's exit from the European Union.

– (Reuters)

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