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Negative comments from EU Brexit negotiators ‘could trigger sterling fall’

UK Secretary of State for Exiting the European Union David Davis, left and the European Commission's Chief Brexit Negotiator Michel Barnier. (Reuters)

LONDON: Negative comments from European Brexit negotiators could trigger a decline in the value of the British currency, analysts warn, as talks between the two sides kicked off on Monday.
The UK Brexit commissioner, David Davis, began the first full round of negotiations with EU chief negotiator Michel Barnier, with the Brussels-based talks set to include issues including citizens’ rights, the ongoing EU budget commitments, and Northern Ireland issues.
Market analysts are watching the Brexit talks closely to see how they could affect their investment decisions. Harry Thompson, a market analyst at PhillipCapital UK, told Arab News that “these next few days will be an eye-opener for future trade negotiations, meaning the extent to which each party is willing to concede on certain areas may be the key driver for sterling.”
Due to the result of the UK election in June, it is possible that the UK government can no longer take a hard-line stance and David Davis’ hand in negotiations has been negatively impacted, Thompson added.
“Should we see evidence that Davis’ hand has truly been dented, we could see (the) sterling rise as the UK looks set to avoid a hard Brexit,” he said.
“For now, both parties may continue to hide behind their poker faces, with a lack of cooperation likely to send sterling lower as investors fear the possibility of a hard Brexit.”
Thompson added that investors would also be keeping a close eye on UK inflation and retail sales data this week. “The recent change in rhetoric from the Bank of England (BoE) has meant sterling has pushed to fresh highs as investors increase their bets on higher rates in the UK. Should CPI this week confirm that inflation remains at four-year highs, we could see sterling climb higher, with Brexit negotiations (taking) a back seat to the eventuality of a near-term rate-hike from the MPC.”
The pound has slumped since the Brexit referendum in June 2016, but predictions of immediate doom have not proved accurate with the UK economy estimated to have grown 1.8 percent in 2016, second only to Germany’s 1.9 percent among the world’s Group of Seven (G-7) leading industrialized nations.
Chris Beauchamp, chief UK market analyst at IG agreed that sterling has gained recent strength, with BoE Gov. Mark Carney “turning his tone on interest being enough to change the market sentiment.”
Beauchamp told Arab News he would be looking out for comments from the European contingent this week: “We would look more to the European spokespeople — they seem to have the upper hand in the conversations. So there is a risk that their comments could negatively affect the sterling,” he said.
As Britain prepares to leave the EU, the government has been eyeing closer relationships and special ties with regions outside Europe. According to Beauchamp, it is the UK’s “lynchpin” strategy to make sure it has international arrangements in place and to give the impression that it is open for business with regions like the US and the six-nation Gulf Cooperation Council (GCC).
In March, it was reported that Gulf Arab states are pressing for an early deal on free trade with Britain to secure preferential arrangements after Brexit, and could have a draft agreement ready within months, Gulf officials say.
One of the first agreements could be with the GCC. Trade between Britain and the GCC totals about £30 billion ($39.1 billion) annually.
GCC states are trying to diversify their economies and boost non-oil trade after more than two years of low global oil prices that have hurt their finances. They export mainly oil, gas and related products to Western economies while importing a wide range of goods and services.
Jason Tuvey, Middle East economist at Capital Economics, told Arab News: “In aggregate, it is unlikely that a weaker pound would have a significant impact on trade with the GCC. Trade ties are relatively small and most exports from the region to the UK are hydrocarbons, demand for which tends to less affected by swings in exchange rates.”
“That said, a weaker pound would make UK goods relatively cheaper and this could support UK industries, particularly defense, which are heavily reliant on demand from the Gulf. When it comes to discussions over trade agreements, the UK government is likely to put the defense industry front and center of talks with the GCC,” Tuvey added.
— With input from Reuters

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