Markets React As Brexit Moves Along

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What's going on?

Britains Prime Minister (PM) set a timetable for the countrys formal withdrawal from the European Union (EU) over the weekend and, in trading on Monday, the pound hit a 3-month low versus the US dollar!

What does this mean?

The PM said she would trigger Britains exit from the EU by April next year, after which the UK and EU will have two years to negotiate their new relationship. For investors, it was (as expected) confirmation that the UK government is going ahead with Brexit negotiations without, for example, planning to hold new elections. Concerns remain that Britain will be a less attractive place for international investors and businesses following its withdrawal from the EU (e.g. fewer international companies may base themselves in London if free trade access to the EU is not maintained). If fewer international investors and businesses want to do business in the UK, then demand for the UKs currency would likely fall. Thus, by selling the pound right now, markets are preparing for an expected decrease in demand for it.

Why should I care?

For markets: The weaker pound is helping UK manufacturers.
According to some economic data released on Monday, the UKs manufacturing sector (e.g. factories) had their strongest month in two years in August. Thats likely because the weaker currency makes it easier to sell goods abroad (they become cheaper for foreigners). Its worth noting, however, that manufacturing only makes up about 10% of the UK economy.


The bigger picture: Investors are ascribing a higher likelihood to a so-called hard Brexit.
Its likely that the negotiations will center on the trade-off between British access to free trade with the EU versus the EUs desire for Britain to accept immigrants from the EU. Investors took the PMs comments over the weekend as a sign that the government is prepared to sacrifice at least some of Britains trading relationship with the EU in order to exert more control over immigration. This isnt necessarily the correct interpretation of the PMs words – but it certainly contributed to the pound selloff.

Originally posted as part of the Finimize daily email.

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