Two weeks ago when David Davis exited the UK cabinet in protest at the so-called Chequers deal, the markets and sterling took a vaguely positive view of proceedings, strengthening on the notion that Theresa May was finally facing down the hardline Brexiteer faction in her government.
When Boris Johnson, the most prominent Brexiteer, left 24 hours later, the markets didn't strengthen further but sank – the rationale being to lose one Brexiteer was good for a soft Brexit but to lose two was potentially fatal for the government trying to achieve a soft Brexit. Such was the nuanced reaction to the increasingly uncertain, complex and hard-to-fathom Brexit process.
While Wednesday’s slide – sterling fell 0.3 per cent against the euro to 89p in early trading – was linked to the Brexit logjam in the British parliament, the real momentum was created by weaker-than-expected UK inflation figures, which cast doubt over the expected Bank of England interest rate rise next month.
Orderly exit
If anything, the markets have accommodated themselves to a certain degree of Brexit turmoil – not surprising given the current state of UK politics – and perhaps they’re banking that somehow an orderly exit will be agreed even if the ride to that point will be torturous.
"The relatively confined degree of sterling volatility in recent weeks suggests that political uncertainty has chased many potential market players to the sidelines," Rabobank said.
What’s most surprising in the Brexit jigsaw, however, is the resilience of the UK economy, potentially the biggest fall guy, amidst a welter of warnings and threats from big industry players.
UK employment rose to a record high in the three months to May, while wage growth is running ahead of inflation, meaning households are now enjoying a return to real spending power after a year-long pay squeeze. The National Institute of Economic and Social Research is also forecasting a pick-up in headline growth in the third quarter thanks to the perennially strong services sector. All of which is hard to square with the dark clouds that circle the economy and the threats to pull out from firms such as Airbus and Jaguar.
