The markets adjust their Brexit calculations

SOMETIMES the markets are genuinely surprised. On the morning of April 18th, news that the British prime minister was to make an announcement at 11.15am caused the pound to dip. What could the news be? Retirement due to ill-health? Several pundits went on Twitter to proclaim their belief that it would not be an early election; after all, Theresa May, the prime minister, has said repeatedly that the poll would not occur until 2020. But the news was indeed that an election will happen on June 8th. The pound then stormed higher and is now more than $1.28, around its strongest level this year (but well below the $1.50 touched on the day of the Brexit referendum).

So what explains the switcharound? The hope is that the election will lead to a softer Brexit result and thus be better news for the British economy. Deutsche Bank, previously bearish on sterling, was the most prominent convert to this view.

First, it makes the deadline to deliver a "clean" Brexit, without a lengthy transitional arrangement, by 2019 far less pressing given that no general election will be due the year after. Second, it will dilute the influence of MPs pushing for hard Brexit, strengthening the government's...Continue reading