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Last week’s appearance from Theresa May saw a potential ground breaker in Brexit negotiations, with a £20 billion package offered in exchange for the commencement of negotiations for a transitional deal. Unfortunately, this simply seems like yet another opportunity for the main actors on the EU side to push back on the UK negotiating team, as they signal to the remaining EU nations that it doesn’t pay to leave the group.
This desire to prove the UK wrong is likely to be a huge driving force in the negotiations, with one side of the table seeking to actively undermine discussions. Both sides of the negotiations have their audience, with EU nations pressing Barnier to stay steadfast, while a whole host of voices within the UK ensure that David Davis doesn’t give up too much ground. This provides us with a backdrop to these negotiations that are not conducive to a positive resolution. The longer these negotiations go without any breakthrough, the greater chance there is for businesses to take steps to mitigate a worst case scenario. That shift in business confidence is the type of thing that will inevitably impact the value of the pound via weakening economic data.
In a recent article, the relationship between UK data (services PMI) and the pound was highlighted. Those PMI readings will also be impacted by confidence of consumers to spend, and businesses to invest for the future. If the negotiations continue to point towards a roadblock, or an inability to obtain a deal in time, then the likeliness is that we will see the pound suffer. The image below highlights the relationship between consumer confidence and the UK services PMI.