News from the FT that the UK may face an initial Brexit bill of up to €100bn has dented sterling this morning.
The currency fell by 0.2 per cent against the dollar to $1.29, nibbling into some of its eye-catching recent gains before recovering slightly. Against the euro, the pound is also down by 0.14 per cent to €1.1823.
Broadly, the path for sterling since the general election was called has been higher. As Dutch bank ING puts it, “anything less than a hard Brexit will question whether sterling needs to continue trading at extremely undervalued levels.”
Today’s declines in the pound are small by recent standards, suggesting investors remain confident that a deal can be struck.
Jordan Rochester at Nomura says:
The total size of the settlement is always up for debate so none of these figures are set in stone, but ask anyone who has experienced the early stages of a divorce and there is nearly always a “land grab” round from both sides in the proceedings. So in our view, no side entering into protracted, difficult negotiations will open up by suggesting that the other side is being utterly reasonable and all of their demands will be met with acquiescence. In other words, these types of comments are likely to continue and we think they need to be treated with a large pinch of salt.
Sterling looks to be following suit and has had limited drawdowns thus far, adding conviction to our view that the political Brexit timeline may provide “flashpoints” as today’s news suggests, but the market seems to be taking them on the chin and they are largely priced in.
But the scale of Britain’s exit fee is a prickly issue in the two-year divorce talks, and €100bn would mark a significant step-up and tougher position from the EU side, after initial costs were pinned at closer to €60bn. Brexit secretary David Davis said today that the country will “not be paying” the new higher amount.
UK prime minister Theresa May has rejected the notion of an exit bill, telling Jean Claude-Juncker, the European Commission president, at a recent dinner that any financial terms would be tied to the UK securing a trade deal with the bloc by 2019.
Michel Barnier, the EU’s chief negotiator, is set to publish a draft negotiating mandate, which is expected to include estimates for a Brexit bill, later today.
