Negative views of how Brexit could impact on the economy abound in the analyst community, but what about the other side – the optimistic view?
Consensus forecasts anticipate the British Pound to struggle through the duration of 2017 as the UK economy cools amidst rising inflation and protracted uncertainty amongst businesses as to what the country's future trading relationship with Europe looks like.
Yet, for analyst Liz Martins, analyst at HSBC in London, a smooth and painless Brexit is one of the 'top surprises' investors should be considering in 2017.
Other top surprises include an US productivity revival, the status quo winning in upcoming European elections, a global trade phoenix and a USD liquidity flush.
HSBC's base-case on Brexit is that it will be negative for the UK economy, indeed they are forecasting the Pound to fall to 1.0 against the Euro in 2017.
All indications suggest that the European Union are going to seek out a poor settlement for the UK as punishment for the vote - if the UK were to suffer the bet is that this will serve as a warning to Europeans that exiting the Union is not worth considering.
We heard this week from one of the UK's former European Commission representatives that the Europeans won't even consider the prospect of the UK paying for access to the single market.
Sterling caught a bid in November when Theresa May told a CBI conference that such access could be sought to ensure businesses don't faces a cliff-edge when Brexit takes place. The view was subsequently backed-up by Chancellor Philip Hammond.
But, HSBC's Martins warns that foreign exchange market participants should be aware that a positive surprise might be sprung:
“European negotiators might take a pragmatic approach, allowing for a lengthy transition period. In a bid to maintain European access to London’s financial hub, they might allow passporting for an interim period, for example."
Martin also raises the possibility that the Brits would go all out to negotiate a deal to keep tariffs as low as possible given the “off-cited healthy British appetite for BMW’s and Prosecco.”
“Our concern is more over the non-tariff barriers – customs checks if the UK is outside of the customs union, for example, and checks on UK compliance with EU regulations. These could add a cost of up to 10-15%, according to our trade economist Douglas Lippoldt," says Martins.
However, be prepared for a surprise in which red-tape is minimised.
“But again, the UK might be able to negotiate some kind of deal which reduces the administrative burden on British exporters,” says Martins.
Then there is the potential for political turmoil on the continent this year; something that we see as being positive for the Pound if it transpires.
HSBC say that in such an event the UK may be seen as a relatively peaceful and tranquil, low risk place to base companies, which might not relocate or locate their headquarters in mainland Europe after all.
If these trade objectives were met: the negotiation of low tariffs, the minimization of red-tape and a riskier political outlook in Euroland, the UK economy might defy HSBC's base-case negative projections.
Martins says business investment could remain healthy and GDP would be above 2.0% instead of slumping to 1.2%, as HSBC currently forecast.
There is also the possibility that the exits of other member EU countries – Holland, Italy, France even, or a rising desire to break up the union, or bring back immigration control might lead to a different EU in which the UK could ‘have its cake and eat it’.
And what about another vote on EU membership by a UK populace that regrets its decision?
“The only small possibility of a second referendum we see would be if (a) the economy deteriorated markedly and there was evidence people had changed their minds; or (b) political pressures in Europe increased to the point where governments were forced to become more flexible on freedom of movement – a red line, currently," says Martins.
If the EU were to offer the UK a deal for continued membership with restrictions on freedom of movement, then the UK might put that option to the people suggests Martins.
From a currency perspective, the above smoother view of how Brexit could end, leads to the following forecasts.
Forecasts for the Pound on a Smooth Brexit
GBP would rally versus USD to a post referendum range of 1.30-35.
EUR/USD would rise slightly as a smooth transition would be seen as positive for the Euro.
In addition, inflation expectations would remain contained, the FTSE might decline as large-caps with foreign holdings lost margin from a stronger Pound, and more domestically focussed stocks would gain from a stronger Pound.