The pound spiked today as British business got a boost from a major step forward in securing Britain’s future trading relationship with the EU.
Reflecting business and market optimism, the pound jumped from $1.2783 just after 9am this morning. At the UK stock market close it was up 0.85 per cent today at $1.2876.
The move came after European Council President Donald Tusk said the ‘future framework’ outlining terms of a trade deal had been agreed by negotiators.
British businesses have been pushing for a trade deal to be sorted to settle the uncertainty they face over the UK’s exit from the EU on March 29, 2019. The alternative no-deal scenario could cause chaos for UK firms that import and export.
The pound spiked as news came through that the European Commission had agreed Theresa’s May’s proposed EU withdrawal agreement – now the 27 EU countries must give their stamp of approval
British Prime Minister Theresa May made a statement stating she is ‘confident’ that a good deal is ‘in our grasp’ and that she will ‘deliver it’ this weekend.
Mr Tusk’s announcement clears the way for a special Brexit summit to go ahead in Brussels on Sunday, when leaders of the 27 remaining EU states are expected to give their stamp of approval to the deal.
The pound also rose 0.62 per cent against the euro to €1.292.
Reaction from business groups and insiders was cautiously optimistic, suggesting that while today’s draft agreement is a step forward, more needs to be done to provide true certainty in the long run, particularly for once the transition period ends.
Josh Hardie, deputy director-general of the Confederation of British Industry, said: ‘It appears that we’re on the cusp of a much-needed agreement. This shows a deal can be done and businesses across the Continent will be watching this weekend’s EU Summit closely.’
He added: ‘The progress made is a credit to both sets of negotiators. But hard work lies ahead. A 20 or so page vision needs to become a 2000-page agreement that secures trade and jobs before the spectre of no deal can be put to rest.’
Mr Tusk announced that the text had been agreed in draft form by EU and UK negotiators and ‘agreed in principle at political level.’
Dr Adam Marshall, director of the British Chambers of Commerce, said: ‘The reality is that the clarity and precision businesses need to plan for the long term can only be delivered when the details are hammered out and fully agreed.
‘There are still big questions to answer – including whether businesses will be able to conduct trade between the UK and the EU without significant new barriers or costs.
‘For business, this is just the end of the beginning of the Brexit process. Our trading firms will be paying close attention to what happens next, particularly as the proposals are debated in Parliament over the days ahead.’
Stock market reaction
While the pound was up today, it was a different story for the stock market.
The blue-chip FTSE 100 index closed down 1.28 per cent at 6,960.3.
However, the FTSE 100 often moves in the opposite direction to the pound as it is dominated by major international companies, with big overseas earnings.
A fall in the pound boosts profits when translated back into sterling, while a rise dents them
The FTSE 250 index, which is often seen as providing a more accurate insight into the health of the economy and British business, closed down 0.3 per cent at 18,530.
Allie Renison, head of Europe and trade policy at the Institute of Directors, told This is Money: ‘The objectives outlined are ambitious at a high level but there is a fair amount missing in terms of specifics, and we hope that the final draft following the forthcoming EU summit can rectify this to some extent.
‘That said, much of the detail firms are in need of can only be realised through our future trade negotiations once the withdrawal agreement is in place.
‘One notable bright spot was the prioritisation of an adequacy decision on data protection.
‘Without this the many businesses that send personal data across the Channel would face serious disruption and cost.
‘On the other hand, the lack of ambition on arrangements to replace freedom of movement will cause concern.’
Mike Cherry, chairman of the Federation of Small Businesses, thinks there is still uncertainty in respect of how small companies will operate after the end of the transition period
Meanwhile, Tom Kibasi, director of the left-leaning thinktank the Institute for Public Policy Research, has warned that the ‘declaration is warm but the message in brutal.’
In a statement published on Twitter, Mr Kibasi said: ‘The political declaration confirms that Britain is heading for a hard Brexit – if it can solve the Irish border problem and avoid the backstop.
‘The language is warm but the message is brutal: if the UK aligns to EU regulations, trade will be easier.
‘But no one should be in any doubt that this declaration rules out frictionless trade. And should the UK diverge its regulatory framework new barriers will be erected.’
He added: ‘The political declaration will only deepen the Prime Minister’s political problems: a Brexit that both disrupts trade and breaches red lines on the role of the ECJ is unlikely to gather significant support from either side of the divide.’
Small businesses play a major role in Britain’s economy and the sector is keeping a keen eye on the daily twists and turns of negotiations.
Speaking to This is Money, Mike Cherry, chairman of the Federation of Small Businesses, said: ‘Last week’s draft withdrawal agreement brought with it the promise of hope that the coveted transition period was a step closer to being secured – a transition period that avoids a damaging and dangerous no deal Brexit that would be catastrophic for the UK’s small businesses.
Dr Adam Marshall, director of the British Chambers of Commerce, said: ‘There are still big questions to answer’
‘As today’s political declaration outlines, this is just the start of what will be a monumental task in shaping what our eventual future relationship with the EU will be once we actually leave.
‘Once we leave the EU on the 29th March 2019, the job must start in earnest to negotiate this comprehensive partnership and secure the easiest and least costly access to the EU single market and those countries we currently have trading relationships with through our membership of the EU. Small businesses need and want a trading relationship that does not bring with it extra costs or administrative burdens.’
Within the UK, the services sector comprises around three quarters of the country’s economy. A crucial part of the sector is hospitality, which often relies heavily on EU workers coming to work within the UK.
Kate Nicholls, chief executive of UK Hospitality, said: ‘This is a positive step forward for businesses looking for stability and clarity in order to plan their investment.
‘Hospitality operators need to know they will have the reassurances provided by a deal. It cannot be stressed enough that a no deal Brexit would present the sector with severe problems and would have a serious impact on confidence. This agreement demonstrates a clear alignment on a direction of travel.
‘This crucial step in securing a Brexit withdrawal agreement will provide much-needed confidence that a no deal scenario will be avoided.’
Cautiously optimistic: Kate Nicholls, chief executive of UK Hospitality, told This is Money, ‘This is a positive step forward for businesses looking for stability and clarity’
Today’s draft political declaration on the future relationship between the UK and the EU foresees a free-trade area with deep regulatory and customs cooperation.
The draft statement, which comprises 26 pages, sets out the structure for the future UK/EU relationship, which will be fully negotiated after the UK exits on 29 March.
Commenting on the pound’s movements, Simon Harvey, an analyst at Monex Europe, said: ‘This week ’s lull in news flow has finally been broken, but sterling still faces a difficult few days.
‘Questions regarding May’s ability to navigate her draft deal through Parliament and whether all EU countries will sign off on the deal remain, along with the likely Brexiteer reaction.
‘This has undoubtedly capped sterling’s kneejerk reaction this morning. However, the reaction itself is more telling than its magnitude. Optimism still remains in the market and sterling’s ability to explode at the blink of an eye is captivating.’
Currency matters: The pound is marching ahead this morning as embattled Prime Minister Theresa May took a major step forward in securing Britain’s future relationship with the EU
Hamish Muress, currency analyst at OFX, said: ‘Reports this morning that the EU have agreed to a draft deal on future trade relations has seen sterling bounce, but the currency is still much weaker than it was 8 days ago, before Raab’s surprise resignation.
‘The post Brexit trade relationship has been pushed to one side over the last few weeks as focus shifted to the backstop issue in Ireland, as issue that remains a stumbling block for Theresa May.’
Craig Erlam, an analyst at OandA, told This is Money: ‘The price action over the last couple of hours clearly demonstrates how sensitive the pound is to any Brexit developments, regardless of source or significance.
‘I don’t think anyone expected the final details on the future relationship to derail the deal and yet reports that it has been concluded ahead of the meeting triggered a strong rally.
‘Naturally there’s been a flood of comments since then that has brought volatility but the currency remains buoyed ahead of a potential announcement by Theresa May this afternoon. It is worth remembering though that this is only a small first hurdle of many larger to come, which may offer insight into the kind of upside we can expect in the coming months’
Earlier this month, the pound slumped as Theresa May struggled to cobble together support for the 585-page draft agreement documenting the UK’s future relationship with the EU.
A string of high-profile resignations, including Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey, exacerbated the pound’s decline.
The pound plunged by 1.5 per cent against the dollar to below $1.28 after the shock resignations.
Bank of England governor Mark Carney asked major UK banks to talk to City regulators and give their feedback on the market reaction to the shock ministerial resignations.
Pound reaction: The pound rose sharply against the US dollar amid today’s Brexit news