Strengthening pound suggests Brexit deal is getting closer

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

11 October 2018

With less than six months to go till we leave the EU on March 29th, all eyes are on whether a deal is in sight. Looking at the movement of the pound, which has been strengthening against the euro over the past month, the currency markets are speculating that good news may be on the horizon. However industry, particularly the UK car industry is still preparing for the worst.

Michel Barnier, the EU’s chief negotiator said yesterday that a final deal on the terms of Britain’s divorce from the EU is “within reach” by next Wednesday’s meeting of European leaders. Mr Barnier announced 80-85% of the treaty has now been agreed and promised Brussels would respect the “constitutional integrity” of the UK.

Previous comments by senior EU officials have helped boost the pound lately. With £1 buying just over 1.14 euros, sterling has been steadily rising over the past month. It is now at levels last seen in June before it dropped over August, which many of us felt first hand on our European summer breaks.

Even if a deal is not reached on 17 October, which judging by the speed of progress made so far and ongoing sensitivities over the Irish border question cannot be guaranteed, any positive comments made over the coming days will be welcomed by the currency markets.

Of course a strong pound is not welcomed by everyone. It makes products manufactured in the UK more expensive to sell to foreign buyers. One major industry closely monitoring the currency movements, as well as the wider Brexit negotiations, is the UK car industry.

Last week Nissan became the latest manufacturer to warn against a hard Brexit. The Japanese carmaker that employs almost 8,000 people in the North-East, said “frictionless trade has enabled the growth that has seen our Sunderland plant become the biggest factory in the history of the UK car industry, exporting more than half of its production to the EU.”

This comes at a time when car companies are already struggling with uncertainty over the future of diesel. Sales of new cars in the UK fell by 20% in September according to figures by the Society of Motor Manufacturers and Traders (SMMT). September is traditionally a bumper month for sales as consumers rush to buy cars with new number plates. However last month was the worst September for car sales since 2008 when the UK was in recession.

To add further to the gloom, Jaguar Land Rover is planning a two week shutdown of its Solihull plant at the end of October. The company blamed weakening global demand, especially in China and has suffered from falling diesel sales recently. Thankfully they also confirmed that employees would still be paid during the shutdown and no jobs would be lost.

But it’s not just the big multinational car makers that are concerned. So are their suppliers. Taking Nissan as an example, it is estimated that in the UK 30,000 people are employed by companies supplying the company.

Often these are small and medium sized companies. The Society of Motor Manufacturers and Traders (SMMT) say 69% of suppliers to the car industry employ fewer than 10 people.

In response, the trade body has launched what it’s called a Brexit Readiness Programme to particularly help smaller suppliers prepare for the worst case scenario. This includes a support package which will see five law firms and accountancy firms offer advice and consultancy services to SMMT members.

SMMT boss Mike Hawes said: “A strong local supply chain is the backbone of any manufacturing sector, and ours has thrived thanks to massive reshoring efforts and the ability to trade freely and frictionlessly with the EU.”

As EU leaders prepare to meet next Wednesday, the currency markets will be closely scrutinising every politician's word on the prospect of a Brexit trade deal. For now the pound, at least, is expecting a more positive outcome than it did a month ago.

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