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Article 50: “historic moment from which there can be no turning back”

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Theresa May triggered a two-year countdown to Britain’s breach with Europe on Wednesday by serving notice to Brussels that she intends to end their 44-year relationship in pursuit of a new place for the UK in the global order. “This is a historic moment from which there can be no turning back,” she declared. Mrs May invoked the EU’s Article 50 exit clause just before 1.30pm Brussels time when the UK’s ambassador to the EU, Sir Tim Barrow, handed in the prime minister’s “notification of withdrawal” letter to Donald Tusk, the European Council president.

The six-page letter was seen in European capitals as broadly conciliatory and flexible, but Mrs May also conveyed a tough warning that EU security would be “weakened” if Britain left the bloc without a new comprehensive deal with Brussels. Mrs May’s stated desire for a “deep and special partnership” combined with a veiled threat that a complete break from Europe could harm EU security was reinforced by Amber Rudd, the home secretary, who noted Britain was the biggest contributor to Europol, the EU crime-fighting body. “If we left, we’d take our information with us,” she said.

European capitals largely chose to focus on the conciliatory tone of most of the letter and Mrs May’s address to parliament, delivered just as her missive reached Mr Tusk’s hands. The presentation of the exit letter, the first occasion in the EU’s 60-year history that a full member state has chosen to leave the bloc, was at first greeted with dark humour from Mr Tusk: “After nine months, the UK has delivered.” Later he offered a more sombre assessment: “As for now, nothing has changed. EU law will continue to apply to and within the UK. We already miss you, thank you and goodbye.”

But the government’s approach drew some criticism at home. Nick Macpherson, the former Treasury permanent secretary, tweeted: “Crime and terrorism don’t respect borders. It is not a credible threat to link co-operation to a trade deal.”Most European diplomats were less critical, arguing that Mrs May was simply trying to use Britain’s so-called “security surplus” to bolster a meagre negotiating hand. “They have two forms of leverage: money and security,” said one EU diplomat. “They weren’t going to offer large sums of money in the letter so the language on security was to be expected.”

The British prime minister called the activation of Article 50 a “great turning point in our national story” but her remarks to the House of Commons also marked a shift to a softer tone. Mrs May promised to approach talks in a spirit of “respectful, sincere co-operation”. Mrs May also called for early technical talks on a “bold and ambitious free trade agreement” that would cover financial services, including new mechanisms to create a level regulatory playing field between the UK and EU. Mrs May said she wanted to end the role of the European Court of Justice in setting British law but has left open the possibility of some kind of ECJ role in policing issues such as trade disputes and arguments over regulatory divergence. The prime minister also hinted it might not be possible to nail down a final agreement on a trade deal within two years, saying it was vital that business should not be presented with a “cliff-edge” upon Brexit in 2019.

In a shift in language, Mrs May acknowledged that the UK would pay a price for Brexit. “We know we will lose influence over the rules that affect the European economy,” she wrote. It was effectively a plea to EU leaders not to “punish” Britain twice. Germany said the negotiations would not be easy for either side. Chancellor Angela Merkel took a hard line on the sequencing of the talks, saying Britain’s future relationship with the EU could be discussed only after a divorce settlement is reached on the terms of Britain’s exit, which is expected to include the €60bn Brussels believes the UK still owes the EU. “Only when these questions are cleared up can we subsequently — but hopefully soon — talk about our future relationship,” she said in a speech in Berlin.

While Wednesday marked the well-flagged formal start of the UK’s exit from the EU, investors’ attention was diverted to a media report that the ECB’s policy intentions from its March meeting had been misinterpreted and the central bank was now wary of making changes to its upcoming April policy message. The euro was down 0.1 per cent in Asia to an eight-session low of $1.0751, but had sunk 0.4 per cent on Wednesday in the wake of the report from Reuters. European stocks closed about 0.3 per cent higher on Wednesday.

Elsewhere in currency markets, the British pound was up 0.1 per cent on Thursday at $1.2445, recovering from a cumulative back-to-back loss of 1 per cent as the UK commenced formal proceedings to leave the EU. The dollar index is up 0.1 per cent today at 100.05. The gauge is eyeing its first three-day gain since early March.

EUR/USD – Current Price $1.0756 (-$0.0010)

EUR/USD it a touch lower ahead of the European open. The US Dollar index edged up to the weekly high seen on Monday overnight, keeping the pair on the back foot although this could well change with a busy morning of macro releases, including German state CPI prints and Euro Zone confidence indicators. The overnight low at $1.0740 sits just above out first support level which is the prior days low at $1.0738, beyond which we target the March 21st low of $1.0717. On the upside, yesterday’s high at $1.0826 and Tuesday’s high at $1.0872 are in focus.

GBP/USD – Current Price $1.2435 (+$0.0003)

GBP/USD is little changed this morning, after a fairly narrow 24 pip trading range overnight. The pair is currently residing above $1.24 after spending most of yesterday flipping either side as the UK officially began the process of withdrawing from the European Union. Looking ahead, UK macro releases are absent this morning and investors may have to wait until this afternoon for fresh impulses with US GDP and an abundance of FOMC chatter expected. From a technical view, yesterday’s high at $1.2474 may offer some resistance ahead of the $1.25 level. On the downside, yesterday’s low at $1.2375 and the March 21st/20th low at $1.2342/35 are in focus.

USD/JPY – Current Price ¥111.13 (+¥0.10)

USD/JPY is slightly higher ahead of the European open although has moved off its best levels in recent trade. The pair hit a daily high of ¥111.42 overnight but saw gains dissipate as Asian equity markets turned lower in the latter stages of the session. Comments from BoJ Deputy Governor Iwata were largely ignored as he said that their powerful monetary easing should continue. From a technical view,  yesterday’s low at ¥110.69 and Tuesday’s/Monday’s lows at ¥110.15/09 may offer support while on the upside we look for resistance at last Friday/Thursday highs at ¥111.48/57 ahead of the March 21st prior low at ¥112.28.

GBP/EUR – Current Price €1.1557  (+€0.0010)

GBP/EUR is a touch higher ahead of the European open. The pair gained sharply yesterday after the Euro weakened on the dovish ECB sources report while Sterling was choppy as the UK officially began the process of withdrawing from the European Union. Ahead, German state CPI readings could prompt some reaction along with Euro Zone confidence indicators while UK macro releases are absent. From a technical view, yesterday’s low at €1.1439 and March 16th low at €1.1414 may offer support. On the upside, we look for resistance at Tuesday’s high of €1.1602 and last Thursday’s high at €1.1620.


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