Written by Mike Dolan
LONDON (Reuters) – The sight of the pound hitting its highest levels since the 2016 Brexit referendum after a surprise election announcement in the United Kingdom is hard to ignore – and may signal hope on the sidelines of recovery from the economic damage linked to Brexit.
What the Peterson Institute for International Economics in Washington described this week as a “self-inflicted wound” by Britain, a chaotic Brexit has crippled inward investment, sterling and British markets for nearly a decade.
The impact of Brexit on the economy now appears to be uncontroversial to most observers. Just last month, the Bank of England's next deputy governor for monetary policy, Claire Lombardelli, said that “evidence suggests that Brexit has had a negative economic impact through investment and trade.”
While parallel shocks from the pandemic, rising energy prices and Ukraine-related inflation make it difficult to measure the exact size of the negative hit, Lombardelli said the analysis showed that Brexit led to a significant and long-lasting increase in uncertainty and a decline in investment, production and productivity. .
Experts aside, the public seems to have already figured it out.
Opinion polls now consistently show that those who think it was a mistake to leave the EU have a lead of around 20 points over those who still think it was right. Some show even large majorities in favor of rejoining.
It remains unclear whether a potential change of government will significantly change things on the issue, but relations between Britain and the EU cannot get much worse than they have been over the past eight years.
The surprise announcement this month of a July 4 election has left the pound and broader UK asset prices largely undisturbed, with betting markets now predicting more than a 90% chance of the opposition Labor Party returning to power for the first time in 14 months. year, with opinion polls progressing. Constantly above 20 pips.
As always, a storm of other factors is weighing on sterling's recent rise – not least the reduced expectations for a rate cut by the Bank of England in the summer.
But the surge in sterling strength leading to a change of government – which includes a rise against the euro to levels not seen since before the government's budget farce in late 2022 – appears to be more than just a cyclical development.
The Bank of England's trade-weighted sterling index hit its strongest levels this week since the 2016 referendum that ultimately took Britain out of the European Union in 2020, 47 years after it joined the single market.
Although the pound is still about 5% below pre-referendum levels, it has rebounded more than 10% from its low in the 2022 budget-related crash and has risen by about 2.5% this year alone.
But returning to 2016 levels is a major milestone. What's more, long-unpopular, sparsely owned and deeply discounted British stocks finally joined their peers at record levels this month despite a stronger pound.
Side Action Party
Although Labor has been keen to avoid what it sees as a divisive Brexit issue over publicity and has ruled out any plans to return to the EU single market or customs union, it has pledged to renegotiate a post-Brexit deal with the bloc. Brussels Trade.
Last September, Labor leader and likely next prime minister Keir Starmer promised to improve trade relations with the EU in 2025 if his party won the election.
Starmer said he would seek closer ties with the EU when the partnership is reviewed next year, with the aim of improving former Prime Minister Boris Johnson's 2021 Trade and Cooperation Agreement (TCA) in areas such as security, innovation and research.
This seems marginal and far from any sign of a major Brexit reversal.
But the kind of large parliamentary majority currently expected from Labor could give the new government plenty of scope to re-engage with Brussels on a whole range of issues if it so desires.
For markets monitoring the situation, the publication of election data in the coming weeks now marks the next turn, even if hopes for anything concrete about Brexit are low and with opinion polls suggesting the issue is low on voters' list of priorities at the moment.
Gilles Mueck, chief economist at AXA Investment Managers, doubts either party will want to address Brexit before the vote, although he believes this is the “elephant in the room” when it comes to the overall economic picture.
Alan Monks, of JP Morgan, fears the absence of something clearer in his manifesto could mean Labor will not have a mandate to act more forcefully over the coming years.
“Governments often deviate from their formal pledges, but given the controversy surrounding this issue, it seems unlikely here without a public vote,” Monks said. “The TCA is ready for review… but the EU has indicated that this is a matter of resolving initial problems rather than an opportunity to open the agreement to meaningful changes.”
Low expectations provide room for surprise? Or maybe there are simply other fish to fry?
Whether he hopes for Brexit or not, Sterling appears to be making up his mind either way.
The opinions expressed here are those of the author, a Reuters columnist.
