Sterling singing to (leaked) tune ahead of Theresa May speech

Reports in the British press about the content of Theresa May’s planned speech tomorrow seem to confirm that the prime minister may sacrifice access to the Single Market in exchange for control over EU immigration into the UK.

Unsurprisingly perhaps, Sterling has weakened further but the currency may get some (temporary) respite if the content of Theresa May’s actual speech is somewhat more conciliatory.

In particular I would expect markets to focus on whether the UK government has moved closer to agreeing to a transitional arrangement once the UK has actually left the EU and whether any progress has been made in protecting the all-important UK services sector.

About 45% of the UK’s total exports are destined to the other 27 EU member states and about 53% of its total imports come from the EU. In comparison, only about 9% of the EU-27 exports of goods and services are destined for the UK. Similarly, only 9% of the EU-27 imports of goods and services come from the UK.

The EU thus has far more leverage over the UK than vice-versa assuming these 27 EU member states are willing and able to negotiate as one trading block, in my view. This imbalance is even greater in traded goods alone.

However, when it comes to services, the picture is somewhat more balanced and the UK may arguably have a stronger bargaining hand.

Simply put the EU buys and sells a far greater share of its services to/from the UK than it does for goods and it may be difficult for EU countries to substitute imports of financial services from the UK given London’s pre-eminence as a financial centre.

Read the article in full on my website.