Mike Dolan
LONDON (Reuters) – It’s hard to ignore the possibility that sterling will hit its highest level since the 2016 Brexit referendum following a surprise UK election announcement – and it could raise hopes of a recovery from the economic damage associated with Brexit.
In what Washington’s Peterson Institute for International Economics called this week a “self-inflicted wound,” Britain’s disorderly exit from the European Union has dogged domestic investment, the pound and British markets for nearly a decade.
The fact that Brexit has damaged the economy now seems undeniable to most observers. Just last month, the Bank of England’s (BoE) next deputy governor for monetary policy, Claire Lombardelli, said that “the evidence suggests that Brexit has had a negative economic impact through investment and trade.”
While parallel shocks caused by the pandemic and energy and inflation shocks linked to Ukraine make it difficult to measure the exact size of the negative hit, Lombardelli said the analysis showed that Brexit has led to a significant and long-term increase in uncertainty and declines in investment, output and productivity. .
Experts aside, the public seems to have already figured this out.
Opinion polls now consistently show that those who think leaving the EU was wrong are about 20 points ahead of those who still think it was right. Some show large majorities even in favor of reunification.
It is still far from clear whether the likely change of government will lead to a significant change in the situation on this issue, but relations between the UK and the European Union are unlikely to get much worse than they have been over the past eight years.
This month’s surprise announcement of a July 4 election has left the pound and broader British asset prices largely unperturbed, with betting markets now pricing in a more than 90% chance that the opposition Labor Party will return to power for the first time in 14 years, according to polls public opinion. consistently above 20 points.
As always, a host of other factors have contributed to sterling’s recent rise – not least reduced expectations for the Bank of England’s summer interest rate cut.
But the strength of the pound as a result of the change of government, which includes the pound rising against the euro to levels not seen since the government budget farce at the end of 2022, appears to be more than just a cyclical reversal.
The Bank of England’s trade-weighted sterling index this week hit its highest level since the 2016 referendum that ultimately took the UK out of the EU in 2020, 47 years after it joined the common market.
While the pound is still around 5% below pre-referendum levels, it has rebounded more than 10% from its fiscal collapse trough in 2022 and is up around 2.5% this year alone.
But the return to 2016 levels is a notable milestone. What’s more, long-disliked, undervalued and heavily discounted UK shares have finally joined peers in hitting record highs this month, despite the pound’s rise.
LABOR STEP
While Labor has sought to avoid what it sees as the divisive issue of Brexit during the election campaign and has ruled out any plans to return to the EU single market or customs union, it has vowed to review the post-Brexit deal with the Brussels trading bloc.
Last September, Labor Party leader and likely next Prime Minister Keir Starmer promised to improve trade relations with the EU in 2025 if his party wins the election.
Starmer said he would seek closer ties with the EU when the partnership is reviewed next year, aiming to improve former prime minister Boris Johnson’s 2021 Trade and Cooperation Agreement (TCA) in areas such as security , innovation and research.
This sounds marginal and far from hinting at a serious Brexit reversal.
But the large parliamentary majority now projected for Labor could give the new government considerable leeway to reengage with Brussels on a range of issues if it so chooses.
For markets keeping an eye on the situation, the release of election manifestos in the coming weeks now marks the next stage, even if there is little hope of anything concrete on Brexit in them and polls show the issue is now low on voters’ list of priorities.
AXA Investment Managers chief economist Gilles Moec doubts either side will want to deal with Brexit before the vote, although he believes it is the “elephant in the room” when it comes to the overall economic picture.
And JPMorgan’s Allan Monks fears the lack of anything stronger in his manifesto could mean Labor lacks a mandate to act more decisively in the years ahead.
“Governments often deviate from their manifesto promises, but given the controversy surrounding this issue, this seems unlikely without a public vote,” Monks said. “The TCA is subject to renegotiation… but the EU has made it clear that this is about addressing teething problems rather than being able to open the agreement to meaningful change.”
Do low expectations create room for surprise? Or maybe there’s just another fish to fry?
Brexit hopes or not, the pound seems to be making up its mind either way.
The views expressed here are those of the author, a columnist for Reuters.