Will a Softer Brexit Stabilize the Sterling?

Today marks the start of Brexit talks between British and EU authorities. It’s not without reason that investors are antsy about Brexit negotiations – the day after the referendum showed that 51.9% of the Queen’s subjects wanted to leave the EU – the Sterling (GBP) plummeted to a 31 year low against other currencies. Between the time polls closed to the time the results were announced, the currency dropped a whopping 10% from $1.50 to $1.33.

With the “defeat” of Theresa May’s Tories by the Labour party, the possibility of a softer Brexit is much closer to becoming a reality. This would mean a much more stable transition and less chance of volatility both in the currency, UK bonds and shares.

Of course, instability will be inevitable, the UK is about to (potentially negatively) change multiple aspects regarding how it deals with one of its biggest markets – Europe.

The most significant effect a softer Brexit will have is in regard to investor confidence. The initial stance of Theresa May’s administration was – according to the actual EU – “completely unreal”. May wanted a fast track solution with a rapidly implemented trade deal in exchange for the UK to pay-off its EU financial obligations and give definitive solutions to EU workers in the UK. To complicate things further Theresa May’s timeline was a mere two year period (until 2019). European Council president Donald Tusk said that the EU sought to clear past obligations before venturing into a new phase of policy implementation.

When Theresa May called for elections, she intended to strengthen her majority in the British Parliament and use that as a bargain chip with her EU counterparts. Unfortunately this back-fired, resulting in a hung parliament – with majority seats being split between May’s Conservative and Jeremy Corbyn’s Labor Party – and a threat at May’s position as Prime Minister.

This resulted in Conservative party Brexit hard-liners being counter-balanced by the many Labor Party’s pro-EU members, which makes a soft Brexit a more likely scenario. This would mean the UK entering an arrangement with the EU similar to the one the Union has with Norway included in what is known as EEA (European Economic Area).

A complete rapid and secession from the union would potentially destabilize the UK’s economy, scare away both investors and capital and potentially necessitate austerity measures until Britain’s European debt would be paid off.

A calculated, progressive and phased Brexit program should mitigate these effects due to a longer term of implementation and maturation.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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