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The following guest post is courtesy of freelance writer Zak Goldberg.
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Prior to the Supreme Court ruling on Tuesday, the pound had hit its highest level since December, yet within minutes of the ruling, the pound had tumbled as the markets reacted to the news the government would need to consult with Parliament before Brexit. A defeat in the House of Lords is unlikely, but if the government is defeated, Brexit could potentially be delayed until 2020.
Delays in Triggering Article 50
When the people voted for Brexit, they probably assumed the UK would exit the EU within a few months. The reality is that it could take years. Theresa May has already signalled she intends to trigger Article 50 very soon, but some MPs and campaigners are determined to delay the process. Not surprisingly, all this uncertainty has caused months of unsettlement in the financial markets.
The Supreme Court, the highest court in the land, has dismissed the government’s plan to start Brexit negotiations without Parliament’s agreement. The news gave sterling a much-needed boost as the markets reacted favourably to the news, with the pound briefly hitting 1.25 against the dollar. The news was then followed with a further announcement that the court had decided the government would not need to consult with Scotland, Wales and Northern Ireland, which would have further delayed the UK’s exit from the European Union.
A Setback for the Government
The ruling has been described as a setback for the government, but in reality, there is no reason why Parliament won’t vote to allow Brexit negotiations to proceed. Theresa May could potentially invoke Article 50 by the end of March, which is something the financial markets are deeply unhappy about.
Even though the ruling means that government will not have to consult with the devolved governments of Scotland, Wales and Northern Ireland, Theresa May will need to be open to compromise on her Brexit strategy if she wants Parliament to vote for the triggering of Article 50. There is also a strong risk that negotiations between Theresa May and the EU will not run smoothly.
Her long awaited speech last week, which outlined her plan for exiting the EU, hinted that the UK would continue to remain a part of the EU’s tariff-free zone. This news was welcomed by the financial markets, but the latest ruling has done little to quell the uncertainty felt by the business community in the UK and Europe.
The Rise and Fall of Sterling
Sterling has fallen by 17% since the British people voted to leave the EU. The pound has rallied in recent weeks, buoyed up by the start of Donald Trump’s presidency and a weaker dollar. The pound enjoyed a sharp rise when Theresa May laid out her plans for leaving the EU last week, but expectations remain pessimistic and sterling is vulnerable to further bad news.
On a more positive note, the path forward for Britain’s exit from the EU is becoming clearer and it is increasingly certain that Article 50 will be triggered in March. Whilst political machinations do little to instil confidence in the financial markets, once there is more clarity in whether the government goes for a hard or soft Brexit, the pound should continue to gain ground against the dollar.
However, spending patterns and inflationary pressures will have an effect on the value of the pound over the next few months, so the likelihood is that sterling will experience further falls against the dollar in the next few months.