Sterling surged to its highest level in 21 months and shares in Irish companies most exposed to the UK climbed, as markets assessed that Theresa May had lifted the threat of a no-deal Brexit.
Her offer to the Commons to vote on delaying Britain’s exit from the EU or ruling out a no-deal Brexit, if her own withdrawal bill fails, marks “a capitulation” that has substantially reduced the risk of a no-deal outcome, Davy chief economist Conall Mac Coille said.
“Should Theresa May be successful in passing her withdrawal bill through parliament on March 12, the UK will move into the transition period out to 2020,” the broker wrote.
“This would keep the UK within the EU single market, preserving the status quo. If not, the debate will soon shift to the length of any Article 50 extension – to end-June or perhaps December 2020. The key point is that the likelihood of tariffs being imposed on March 30 now looks even more remote,” Mac Coille said.
Sterling rose to trade below 86 pence for the first time since May 2017, helping to relieve pressure on Irish exporters, Bank of Ireland said.
The profit margins of firms, in particular for SMEs, selling into Britain can be wiped out when sterling plummets.
Firms were hit when the UK currency slid as much as 15% from 76 pence in the wake of the UK Brexit referendum in the summer of 2016. Sterling could unwind some of those losses and boost Irish exporters selling into the UK.
“Despite succumbing to pressure from her own party and offering the votes to parliament, PM May reiterated her desire to find a deal with the EU and stated that any extension to Article 50 would be for a short period - a once off exception,” said Lee Evans, head of foreign exchange trading and strategy at Bank of Ireland.
“Sterling has now rallied more than 5% since the start of the year giving further relief to Irish exporters; and although an extension to Article 50 still fails to provide clarity to an ultimate Brexit solution, the further reduction in the probabilities of a no-deal scenario should be enough to boost the undervalued pound over the coming weeks,” Mr Evans said.
Joshua Mahony, senior market analyst at online broker IG, said May’s announcement would stop a no-deal Brexit and “it comes as no surprise to see the pound rise”.
Irish shares which have been weighed down since the summer 2016 vote also rallied stongly. Shares in Bank of Ireland, which is exposed more than any other Irish bank to earnings from the UK, rose 1%.
Irish Ferries group, ICG, whose earnings could have been badly hit under a no-deal Brexit, rose 4%, and shares in Dalata Hotel Group which gets a fifth of its revenue from the UK surged 4.25%.
Mr Mac Coille at Davy said: “Our view has been that a no-deal outcome, while highly unlikely, would be a severe threat to Irish GDP growth – potentially pushing the economy into recession.
“Risk aversion to such a hard-Brexit scenario was a key factor driving the underperformance of the Iseq index in 2018, particularly banks, homebuilders, real estate investment trusts and other names exposed to the Irish economy. Looking forward, these sectors should benefit as the tail-risk of a no-deal outcome is perceived to be less likely.”