UK’s Brexit negotiations: Better prospects - SocGen

The analysis team at Societe Generale suggests that the key issue in the upcoming Brexit negotiations is whether the UK will be able to continue to have some access to the EU market post-Brexit under a bespoke free trade agreement.

Key Quotes

“In calling for a snap general election on 8 June, Prime Minister May is hoping to take advantage of the commanding lead for the Conservative Party shown by the opinion polls. The polls imply that the Conservatives should obtain an enlarged majority in the House of Commons in an election. May currently has only a slim working majority of about a dozen MPs.”

“A hard Brexit whereby the UK leaves the EU single market and customs union has already been discounted by the market. A hard Brexit is the declared position of the UK government, and this was reflected in the Article 50 letter delivered to the European Council.”

“A larger parliamentary majority would strengthen the Conservative government's position in the negotiations against the parliamentary opposition. Just as importantly, a larger majority would dilute the threat of a revolt by eurosceptic Conservative MPs against a negotiated Brexit agreement. Some eurosceptic MPs are reportedly against making major concessions to the EU to secure an EU-UK trade deal, believing that the UK economy would be fine trading purely based on WTO rules. Most economists disagree, but the risk of an internal party revolt is high given the slim parliamentary majority held by the government.”

“Thus, the prospect of a larger parliamentary majority has improved the market's assessment of a successful post-Brexit EU-UK trade agreement. The five-year tenure of a new parliament would end in 2022, which is comfortably beyond the two-year Article 50 deadline, providing comfort that the negotiations will be less likely to break down. This has buoyed sterling, and the potential for further short covering is high given the speculative net short position in the currency.”

“On the other side of the cable currency pair, the prospect of large-scale fiscal stimulus by the Trump administration has waned. Even the controversial border tax proposal seems likely to be shelved at this point. This suggests that the dollar uptrend is approaching an end.”