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Euro Weekly Update - July 1st 2016

MoneycorpEight days ago no one had ever heard of Article 50 of the Treaty of Lisbon. Even today few would be able to explain it to their mates down the Dog and Duck. But anyone with even half an ear on the news will be aware that it sets out the procedure for a member state to make its departure from the European Union. There is more than one complication with Article 50. For a start it has never been tested.
From the point of view of the European Council the problem is that only the departing country can initiate the process: Britain must resign, it can't be sacked by Brussels. From the standpoint of Westminster it is that exit negotiations can only begin once the trigger has been pulled; pre-negotiation negotiations are not allowed, at least in the opinion of most of the EU presidents.

For these reasons Britain's departure from the EU, as mandated by last Thursday's referendum, was put on hold almost as soon as the votes had been counted. On Friday the prime minister resigned, sine die, and handed responsibility for the Article 50 process to his eventual successor. The five candidates who put themselves forward for his job must be whittled down to two by Tory MPs before Conservative party members make their choice between the pair. The names of the two should be known in a fortnight's time and the winner announced on 9 September after the members' poll.

So until then, at least as far as Brexit negotiations are concerned, politicians on both sides of the Channel will be cooling their heels. The first signs are that this interregnum will have a calming effect on financial markets. Certainly in the week since the plebiscite the mood has improved. Few would have expected the safe-haven yen and Swiss franc to be the losers in a week that was expected to be characterised by uncertainty and anxiety but that was what transpired as soon as the initial panic had passed.

Compared with last Friday's opening levels in London (which had already priced in most of the Brexit shock) the euro is two cents higher against sterling and has added a third of a US cent. That isn’t bad for a currency that represents a union which is about to lose its second-biggest member.

It remains to be seen whether the enforced pause will leave exchange rates becalmed. That could turn out to be the case but is hard to imagine investors regaining any real enthusiasm for the euro or the pound. It is easier to visualise a steady, if gentle, downward pressure on the pair between now and the moment Article 50 is activated. Sterling is at the greatest risk, especially after the Bank of England governor hinted on Thursday at the possibility of yet-lower interest rates and renewed quantitative easing. But the euro could be hurt too if it begins to look likely that the European Central Bank might seek to steady its ship by stepping up or extending its own programme of asset purchases.

The Ifs and Buts that qualify every aspect of this situation are so numerous that it will take some time for the market to come to any consensus about which currency will go where when. Beware of complacency: that markets have been calming down during the last few days is not a guarantee that they will remain calm. Unexpected shocks are likely and careful management of exchange rate exposures is essential.

For competitive exchange rates, low transfer fees, expert guidance and the special offer of your FIRST TRANSFER FREE call moneycorp on freephone 800 785 011 or visit www.moneycorp.com/algarve.


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