Pound Declines as May's Brexit Speech Is Seen Short on Details

(Bloomberg) -- The pound fell on Friday as investors were disappointed by U.K. Prime Minister Theresa May’s much-awaited speech in Florence.

Sterling snapped a four-week rally against the dollar as May said she would seek a transition period of around two years after Brexit, but failed to outline specifics on a divorce bill that has been a sticking point in talks with the European Union. U.K. bonds gained as the pound declined.

The speech had been awaited as a barometer of the U.K. premier’s approach to Brexit, following recent news reports suggesting divisions within her own party and a lack of progress in the official discussions with the EU. May promised the U.K. would honor its financial commitments during the period and rights for EU citizens following Brexit.

“Smoke and mirrors from Prime Minister May isn’t fooling the currency market,” said Martin Arnold, a currency and macro strategist at ETF Securities. “Negotiations are ongoing and constructive rhetoric is unlikely to be a catalyst for further strong gains in sterling.”

The pound fell 0.5 percent to $1.3511 as of 4:41 p.m. in London after sliding as much as 0.7 percent earlier. The yield on 10-year gilts fell one basis point to 1.36 percent.

The next round of negotiations between Britain and the EU will begin on Monday, after being delayed to accommodate May’s speech. The bloc’s chief negotiator Michel Barnier said the speech showed a willingness to move forward, after saying beforehand that he wanted to see the U.K. “settle the accounts. No more, no less.”

Here is a compilation of some analysts’ views of the speech:

State Street Global Markets

• “After great anticipation, Prime Minister Theresa May’s Florence speech offered few specifics and even fewer surprises,” said Tim Graf, its EMEA head of macro strategy
• “For the near term, negotiations may likely be hampered by the lack of detail offered on the main items for discussion, namely the Irish border question, the ultimate financial settlement with the EU and the rights of EU citizens”
• “Barnier was not given much new to work with on these points. While the pound weakened and U.K. rates fell during the speech, these moves were quite muted, perhaps an appropriate reaction to a speech carrying very little new information”

Nomura International

• The E.U. will not come out thanking Theresa May for the speech, but the acceptance of a transitional deal in the long run will be what proves key, says strategist Jordan Rochester
• “The speech itself was vague and the important details you could perhaps boil down to just 30 seconds, but it is not what we would use to validate our medium term GBP arguments”

Capital Economics

• The speech was thin on substance but probably contained enough to “unstick” Brexit talks that resume on Monday. The pledge that the U.K. will honor commitments made during its membership should facilitate progress toward agreeing a financial settlement, says economist Paul Hollingsworth
• May’s call for a guaranteed two-year transition period, which would include freedom of movement and access to the EU market on “current terms”, has essentially kicked the can two years down the road. But by increasing the time available for negotiations it probably reduces the chance of a disorderly Brexit

City Index

• “The fact that the pound is lower after the speech suggests that May failed to deliver everything that was expected,” including details of the rumored divorce bill that the U.K. is willing to pay, said Kathleen Brooks, research director. “The EU’s response to May’s speech is likely to be even more important for U.K. asset prices”

ING Groep NV

• The pound fall’s is a “knee-jerk reaction to the fact that there is no mention of an exact figure on the EU divorce bill, though that commitment is as good as any so far,” said Viraj Patel, a currency strategist at the bank. “It should be positive for sterling once the initial noise fades”

--With assistance from Scott Hamilton

To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee