Pound-Euro Rate Back Below 1.10 on News EU is Hardening Stance on Fisheries

- EU coastal states harden stance on fisheries
- No deal likely unless concessions made
- France's Macron said to be frustrating fellow leaders
- GBP/EUR volatile, back below 1.10

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• GBP/EUR spot rate at time of publication: 1.0990
• Bank transfer rate (indicative guide): 1.0700-1.0780
• FX specialist providers (indicative guide): 1.0870-1.0890
• More information on FX specialist rates here

The British Pound has endured another volatile 24 hours as investors react to headlines on the state of Brexit trade negotiations which are now being tipped to extend into November, with the latest news concerning fisheries negotiating putting the currency on the back foot in midweek trade.

The Pound fell, recovered and then fell again on Tuesday amidst news that the EU was willing to see Boris Johnson's 'soft' October 15 deadline slip by, but that EU officials have also seen some tangible progress and that they believe a deal nevertheless awaits. Conflicting headlines that made for volatility but yielded no tangible directional move in Sterling.

However, further news out overnight says the EU is hardening its position on the matter of fisheries which would suggest these talks are unlikely to be concluded soon and tensions will remain elevated.

The anxieties are in turn feeding into short-term volatility for Sterling which can yo-yo quite significantly, to the frustration of traders.

However, if we step back the market is increasingly looking to be one that is consolidating: since late September the Pound-to-Euro exchange rate has been rangebound, with lows coming in around 1.0920 and highs at 1.1070. There appears little to suggest this range will break anytime soon, but heightened volatility within this range is likely to be a feature of coming days.

Sterling lost value and sank towards the bottom of the aforementioned range on overnight reports that EU fishing states have only hardened their position on their desire to maintain full access to UK's coastal waters following Brexit.

Above: Volatility in GBP/EUR since late September. If you would like to book current rates for use up to three months in the future, thereby protecting your international payments budget, please learn more here.

According to RTE's Europe Editor Tony Connelly, European fisheries ministers from key EU states have told Barnier that he must secure full access to UK waters by leveraging the fact that unless the UK accepts all the EU's demands no trade deal will be forthcoming.

"Under the terms of the future relationship negotiations, there can be no overall free trade agreement unless there has been a deal on fisheries," says a report penned by Connelly for RTE. "It is understood member states are pushing Mr Barnier to use the leverage provided by the precondition that a free trade agreement (FTA) cannot be concluded without a side deal on fisheries."

The hardened stance is confirmed by a separate Bloomberg report that says French President The French president Emmanuel Macron is standing firm on his demand to keep the same access to British waters his country’s fishing industry enjoys today.

"Paris’s stance on fish is becoming a second major focus of concern," says the Bloomberg report. "Macron designed the EU’s hard-line opening position - that Britain should be forced to hand over just as much fish as it did when an EU member - and so far hasn’t budged."

The report adds that although the EU continues to put on a united show of force behind France on the matter of fisheries, behind the scenes there are growing tensions, with senior diplomats telling Bloomberg there is tension between Paris, Berlin and Brussels on the matter.

"While they think some of Macron’s stance is a negotiating tactic, trust in the French president has all but evaporated, they said. They are convinced that Macron’s stubbornness could lead to a no-deal outcome," says the report.

"In the area of fishing rights France still seems unyielding," says Thu Lan Nguyen, FX & EM Analyst at Commerzbank. "But even if progress comes in small steps that is likely to be sufficient for the market to remain friendly towards Sterling for now. The risks of course remain high which is why things are more interesting on the options market. Risk premiums here eased recently. However, particularly for those who want to remain on the safe side short term this should constitute a good entry opportunity."

The EU upped pressure on the UK over the matter on Wednesday when Ireland's Foreign Minister Simon Coveney came out and said the UK must not underestimate the EU's position on the matter of fisheries.

Coveney appeared to rewrite international maritime law when he disputed the economic sovereignty a nation has in its territorial waters by saying the fish in UK waters are "not British fish, not EU fish". To draw line down sea is "ridiculously simplistic" way of doing a deal.

He gave an example of Mackerel caught off Scotland by Irish and Scottish boats that spawn in Galway, grow into juveniles in Mayo and then swim up to British waters.

Reuters reported on Tuesday EU diplomats believe Brexit trade negotiations will run until as late as mid-November, which suggests that the headline-driven volatility of the Pound will remain a feature for weeks to come.

On the one hand, it appears an almighty battle over fisheries should keep any GBP strength contained, but equally weakness will be limited by a view that the two sides appear fully committed to striking a deal and typically this can be expected to yield a breakthrough.

While there was no breakthrough at last week’s negotiating round on the three most contentious issues - fishing rights, fair competition guarantees and ways to settle disputes in the future - the prospects of an overall accord looked much brighter according to Reuters.

"We seem to be getting closer and closer to a deal, even though the no-deal rhetoric in public might suggest the opposite," one of two sources told Reuters. Both sources are said to have been been briefed in detail by the European Commission.

"Media reports offering upbeat assessments of talks with the EU have helped the GBP recently... there is some room for manoeuvre now that negotiations are entering the final phase ahead of the EU summit in mid-October. We continue to see the GBP benefitting as the Brexit-related risk premium abates," says Magne Østnor, an economist at DNB Markets.

Foreign exchange analysts at Goldman Sachs have meanwhile told clients they see value in buying Pound Sterling against the Euro in anticipation of the EU and UK striking a Brexit trade deal in coming weeks, while foreign exchange market options pricing suggests a market becoming increasingly of the view the two sides will strike a Brexit deal.

"Go long vs Euro as Brexit Deal nears," says a weekly foreign exchange note to clients from the Wall Street bank. "On our read, recent events are consistent with the EU and UK converging towards a Brexit Deal, in line with our economists’ longstanding expectation for a relatively 'thin' trade deal, likely agreed by early November and subsequently ratified by the end of December."

Data from Reuters meanwhile suggests the broader market is coming around to a pro-Sterling outcome to Brexit trade negotiations, with forward-looking FX option pricing and flows are suggesting a more positive outlook for the British Pound.

"Dealers report that end users of FX options, who typically hedge exposure to GBP in a certain direction, have increased demand for GBP call options, allowing them to benefit from any GBP gains over coming months," says Richard Pace, a Reuters market analyst.

"The only certainty amid the fog surrounding European Union-UK trade talks is that sterling will weaken or strengthen once the fog clears and the outcome of the talks is known."