Pound-to-Euro Exchange Rate: Why Friday's Brexit Talks Could Usher in a Sombre September

-GBP steadies but "clock is ticking" for progress in Brexit talks. 

-PM May to offer further concessions but talks still go to the wire.

-"Stay short" GBP as September approaches say Credit Suisse. 

© Pavel Ignatov, Adobe Stock

The Pound rose against a Turkey-basted Euro this week but the coming days could offer the single currency another place in the proverbial sun, as the latest round of Brexit negotiations coincides with increasingly negative sentiment that now threatens to usher in a sombre September for Sterling.

Negotiators from both sides of the English Channel will meet Thursday to discuss the Northern Irish border impasse in the hope that an agreement can be struck on so called "backstop" arrangements that would come into effect if formal agreement on future trade relations cannot be reached before the end of the "transition period" in December 2020.  

Talks take place as Foreign Secretary Jeremy Hunt tours Finland, Latvia, Denmark and the Netherlands in order to drum up support among EU members thought to be sympathetic to Prime Minister Theresa May's predicament, which has seen her caught between a rock of Brexiteers in the House of Commons and the "hard place" that is Brussels.  

All of this comes with Pound Sterling trading at a near-18 month low, despite a second interest rate rise from the Bank of England delivered in early August, as markets are increasingly concerned about the prospect of the UK departing the EU and defaulting to trading with it on World Trade Organization terms.  

"That would bring a short-sharp economic hit, and probably BOE easing. It goes without saying that it is bad for sterling. Giles Fraser, writing in the Telegraph yesterday, argued that the UK survived the first Brexit - the Reformation - and can do it again. That's true, but Henry 8th's debasement of the coinage saw sterling fell by about 70% in value," says Kit Juckes, chief FX strategist at Societe Generale. 

The Pound was quoted 0.27% higher at 1.2727 against the Dollar Thursday, close to a 14-month low of 1.2660. while the Pound-to-Euro rate was down 0.21% at 1.1168.

Predictions of what a "no deal Brexit" might mean for the economy have ranged from the plausible to the downright bizarre, but most  agree that there will be at least some negative impact on growth in the short term. Disagreement over the Northern Irish border is the greatest impediment to progress in the talks and avoiding a "no deal" scenario. 

The EU has always insisted there can be no "hard border" for the sake of peace in Northern Ireland. But it also says there would have to be one if the UK leaves its single market and customs union because, in a post-Brexit world, the UK would operate different trade tariff regimes with different countries to the EU.

This was the impetus for PM May's "Chequers Deal" proposal for the future relationship that means effective single market and customs union membership for all of the UK's goods trade, alongside a "mobility of labour" agreement that has been criticised as code for the continued free movement of labour.

"The White Paper blurs Theresa May’s previous red-lines and softens policy in regards to goods while calling for a much looser partnership for banks," says Sonali Punhani, an economist at Credit Suisse. "The EU is unlikely to accept the UK’s White Paper in its current form. It raises questions about the indivisibility of the four freedoms, integrity of the single market/ customs union and autonomy of the EU’s decision making."

Critics have lashed out at the Chequers proposal because it abandons PM May's "red lines" around the customs union, single market and the supremacy of UK courts, as well as international trade and migration policies. Brexiteers claim the governments ability to strike trade deals elsewhere would also be impaired if the plan goes ahead.

However, the supposed scale of the Northern Irish border problem is at odds with an Irish Times report from Thursday, 19, July, which claimed Brussels' Jean-Claude Juncker has assured Republic of Ireland Prime Minister Leo Varadkar there will be no "hard border" or physical infrastructure required by the EU following a "no deal" Brexit, or any other kind of Brexit. 

"In our view, the UK will have to make further concessions to get the EU to agree and soften its policy further," says Punhani. "We think if there is any concession from the EU it is likely to come at a price. But a deal is likely to be struck with the UK conceding in our view."

Many analysts and pundits expect the EU to reject PM May's proposals on the future relationship as well as the Northern Irish border, leading the British government to offer further concessions before October's soft deadline.

However, such a move fwould be politically contentious at home and so might not be made until the last minute, creating plenty of scope for markets to fret about the prospect of a "no deal Brexit" as meetings of ministers go past without agreement and the October deadline approaches. 

"We recommend staying either neutral or short GBP with an eye on the very real event risks in the pipeline for September," says Shahab Jalinoos, global head of currency strategy at Credit Suisse. 

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