For several months now, a topic that had been somewhat overshadowed in recent years by episodes of increased inflation and recurring concerns about growth and public finances has resurfaced in British politics: Brexit. Around last summer, Labour politicians increasingly emphasized that the long-term effects of Brexit would worsen the public finance and growth problems. This increased focus on the issue came as something of a surprise at the time, given that Labour had previously been keen to ignore Brexit, Commerzbank’s FX analyst Michael Pfister notes.

Brexit debate returns to UK political spotlight

“On Monday, the pound significantly appreciated against both the US dollar and the euro, despite third-tier data providing little reason for this. While the depreciation of both the euro and the US dollar certainly helped on Monday, the pound also appreciated idiosyncratically. Apart from data or any major news, one of the few arguments for such an appreciation is the British Prime Minister’s statements over the weekend. He emphasized that the United Kingdom wanted to focus on a ‘closer relationship’ to the EU and turned his attention to the single market after a cautious rapprochement with the EU in recent months.”

“The United Kingdom’s problems began well before Brexit, while the Brexit has mainly worsened the situation. Discussions about the British ‘productivity puzzle’, for example, began several years before the Brexit vote. A rapprochement with the EU could alleviate some of the problems of recent years, but it is certainly not a panacea. This does not necessarily mean that a rapprochement would be similarly difficult, but it is unlikely to happen quickly. Access to the EU single market is also likely to be granted only in exchange for concessions. Although the foreign exchange market usually acts with foresight, doing so in the face of so many uncertainties seems exaggerated to me.”

“If improved access to the EU single market were to materialize, the pound would benefit significantly. Monday’s movement would then have been just a small foretaste. A differentiated examination of the effects of Brexit would also be beneficial for British politics. However, it is simply too early to factor in potential positive outcomes.”

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