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Article / 18 April 2017 at 12:41 GMT

Saxo on Brexit: Unsubtle May shores defence for EU talks

Former managing editor, TradingFloor.com / Saxo Bank
Denmark
  • UK prime minister Theresa May has called a snap election for June 8
  • May hopes to use election to strengthen domestic base before EU exit talks
  • GBPUSD hits 1.2688 at 1240 GMT
  • EU position unlikely to change towards UK, whatever the result
  • Election could open the door to 'remain'-supporting Liberals
  • Election poses huge danger to Labour Party and UKIP
  • Read more on our dedicated Brexit page

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Man the defences and present a strong front to Europe. Photo: Shutterstock


By Martin O'Rourke

Well, that was neither subtle nor really a surprise. UK prime minister Theresa May has triggered a snap election for June 8 designed, it would seem, to shore up her position prior to the real business of Brexit talks getting underway sometime later this summer.

The unelected leader no doubt has on eye on the utter disarray that plagues the official opposition Labour Party under the inept leadership of Jeremy Corbyn and the dissenters within the ranks of her own party be it those who would like a softer Brexit path and the hardliners that are demanding as full an exit from the European Union as possible.

But it is above all the negotiators within the EU framework that May has targeted here to try to ensure that her hand is as strong as possible come the start of talks.

As poker moves go, it is quite a deft one, neatly wrong-footing Brussels. Given the 21 points lead that the Conservatives hold over Corbyn's Labour in the polls, the prime minister has every chance of seeing her working majority of 17 increase to help her establish the kind of park-your-bus defence that Manchester United manager Jose Mourinho would be proud of.

GBPUSD certainly liked it soaring from 1.2530 in the immediate aftermath to 1.2670 before hitting 1.2688 at 1240 GMT.

GBPUSD spikes some 140 pips in the aftermath of May's announcement
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Source: SaxoTraderGO

EURGBP also slammed its way down to within touching distance of 0.8400 as sterling bulls blasted into the market to make hay. It was a different story on the FTSE100 which is largely made up of international companies that do well when sterling weakens, as it fell to below 7,200.

EURGBP falls 80+ pips

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Source: SaxoTraderGO

But will May's gambit ultimately avail her in the long run? The EU's stance was made pretty clear by European Council leader Donald Tusk in March that it would not enter into negotiations on Brexit until the terms of the exit have been agreed. With a bill of up to £60 billion potentially landing in the prime minister's in-tray after June 8 (and there hardly a reason to believe it will not be May), there is little reason to think that the EU's stance will change or has to change.

After all, the equation remains the same. The UK will be one against 27 after June 8, just as it is now and once the dust settles, London's fresh poker hand may not move the needle around the negotiating table anywhere like as much as she hopes.

If anything, Brussels is likely to see it as a cheap, cynical manoeuvre that will strengthen its resolve to drive home a hard deal. It should never be forgotten that there is little interest for the EU to see a soft deal with the UK, no matter how significant the economy on its northwest border is, given the example it will set the rest of Europe.

It is a lesson that Europe has already heeded it seems in Austria and in The Netherlands which has helped stem the tide of extremism among the bloc and consolidate the consensus, while the likelihood remains strong (although by no means certain) that centrist Emmanuel Macron will eventually take the plaudits in France. And, whoever emerges victorious in Germany in September, it will be a full-blooded Europhile, totally committed to the European ideal.

For the UK itself, the decimation of Labour under Corbyn is a distinct possibility while the election presents an enormous opportunity for the Liberal Party to re-establish itself as a force after seemingly having taken the brunt of the public's ire with the coalition government of 2010-15 and the perceived broken promises of former leader Nick Clegg to seemingly fall off the political spectrum.

Having rallied around the 'remain' cause since last year's Brexit vote in a way that convinces far more than the half-hearted utterances of Corbyn, there is every chance that the 'remain' vote will flock to the banner even if they know they cannot reverse the result of June 23.

A sizeable surge in Liberal support will nevertheless give May some pause for thought if it demonstrates that Britain remains as fundamentally divided over the issue of exiting Europe as it appeared 10 months ago (52% to 48%).

And as for UKIP? It could be the party's last hurrah. It's a double-edged sword for the Farage-less party as it needs to grasp the opportunity to turn its fortunes around after a disastrous post-Brexit vote period. If it can't, it really could be the end of the movement as May's Conservatives stealthily move onto their hard-won territory.

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May the gambler. Photo: Shutterstock


Martin O'Rourke is managing editor at Saxo Bank

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Martin O'Rourke Martin O'Rourke
See what Saxo Bank CIO and chief economist Steen Jakobsen had to say on May's decision here: https://www.tradingfloor.com/posts/mays-snap-uk-election-could-be-good-for-gbp-investors-saxostrats-8607198
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Martin O'Rourke Martin O'Rourke
GBPUSD was just shy of 1.2750 at 1430 GMT, some 200+ pips higher since May made her snap-election call.

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