The Pound Suffers Nerves as Cox Fails to Deliver Breakthrough, Barclays see Further Profit-Taking vs. Euro and U.S. Dollar

Above: File photo of Stephen Barclay, UK Brexit Secretary. Image © Pound Sterling Live, Audiovisual still courtesy of Daily Mail.

- Pound falling back from recent multi-month highs

- Brexit talks between Barclay + Cox / Barnier "did not go well"

- Analysts @ Barclays wary of further profit-taking on Sterling

The British Pound is seen trading steady in the midweek session, albeit well off recent highs as traders express nerves that the UK will be unable to secure the kind of assurances required from Brussels to pass Prime Minister Theresa May's Brexit deal.

The deal is due to go before parliament by March 12 at the latest, a mere six days away.

It is little wonder then that the markets are edgy, and news that the government's Attorney Generaly Geoffrey Cox has failed to deliver a breakthrough in Tuesday's talks with the EU will unlikely aid those looking for a stronger Pound.

Prime Minister May sent Cox - the government's most senior lawyer - to Brussels to secure the changes to her deal that would allow lawmakers to back it which would in turn an orderly exit from the EU on March 29.

We note there have been reports Cox has been struggling to secure concessions, and yesterday an EU official told Reuters Tuesday's talks "did not go well." A spokesman for the European Commission has meanwhile on Thursday told a regular press briefing at the Commission's headquarters that "Barnier informed Commissioners that while the talks take place in a constructive atmosphere discussions have been difficult. No solution has been identified at this point which is consistent with the WA including the protocol on Northern Ireland which won't be reopened."

"EU/UK Brexit talks apparently went badly yesterday, and Sterling is suffering a bout of nerves," says Kit Juckes, foreign exchange strategist with Société Générale in London. The Pound-to-Euro exchange rate is quoted at 1.1627 at the time of writing, down from last week's high set at 1.1723 while the Pound-to-Dollar exchange rate is quoted at 1.3134, the previous week's high is set at 1.3350.

"Whether a compromise can be agreed by Sunday, so that Theresa May can zoom over there to collect it in a flurry of prime ministerial on-the-jobness, the signs are poor," says ITV's Political Editor Robert Peston. "So close to midnight, her deal remains in serious jeopardy."

Peston adds "the Cox/Barnier talks are unlikely to rescue Theresa May's Brexit deal" as they "were difficult and a distance from a solution".

While the talks between Cox, Britain's Brexit Secretary Stephen Barclay and the EU's Brexit negotiator Michel Barnier ended with no agreement after more than three hours on Tuesday sources from both sides said negotiations among lower-ranking officials would continue on Wednesday.

Cox and Barclay are seeking legal changes to the Irish backstop clause contained in the Brexit deal's Withdrawal Agreement which is designed to prevent a "hard border" being established between Northern Ireland and Ireland. However, critics of the clause say if invoked, it potentially locks the UK into the EU customs union and single market indefinitely, effectively rendering the UK a vassal state of the EU.

The Pound is likely to remain on the back-foot until some concrete signs of progress on this matter emerge we believe.

"Attorney General Geoffrey Cox is spending most of his time in talks with EU negotiators and his verdict will be critical to convincing MPs to support PM May's plan," says Nikolaos Sgouropoulos, an analyst with Barclays. "Inertia and running down the clock towards the March 12 vote deadline might result in some profit-taking, given stretched momentum and overbought conditions in most GBP crosses."

Barclays tell clients political developments in the coming fortnight will largely drive price action for the British Pound. The risk of disappointment, should negotiators not emerge from deadlock, are substantial as Barclays believe the market has largely priced the currency at levels commensurate with a deal eventually passing.

If the deal does pass, "further market-friendly political developments would likely boost the GBP further."

UK parliamentarians are due to vote on the deal by March 12, at the latest.

"I still think on the balance of probabilities there will be something stitched together over the weekend. But it has also become clearer from talking to people ... that the talks do genuinely seem to have gone very badly last night," says Nick Gutteridge, Brussels reporter for The Sun, on the way forward following the lack of progress in negotiations.

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"The role Geoffrey Cox plays here could be crucial," says Derek Halpenny at MUFG in London. "EU officials have already stated that with the UK they are moving towards a 'parallel declaration' or 'interpretative instrument' in relation to the Irish backstop. If Geoffrey Cox endorses whatever legal text/document is agreed in relation to the backstop it could create the catalyst for the ERG/DUP to move to support the May deal."

Jacob Rees-Mogg last week shifted his stance indicating he could support the deal that doesn’t remove the backstop as long as a legal codicil has equal weight to the backstop text. Rees-Mogg is the Chairman of the European Research Group (ERG), a cabal of Conservative party MPs who voted against Prime Minister May's deal in January saying it amounts to a capitulation to the EU.

However, Rees-Mogg appears to now be willing to back May's deal provided negotiators secure legal assurances that the Irish backstop can only ever be temporary if it is triggered.

If May's deal is voted down next week, parliamentarians are likely to vote for a delay to Brexit by requesting the EU extends Article 50.

"In isolation this is not a development we would class as unambiguously GBP supportive. However, if viewed as not a 'one-off' extension and as providing the necessary time for May’s deal passing, the gains for the Pound look justified," says Halpenny.

The timing of the extension will be key. Reports suggest the EU are only willing to approve a long extension, with some reports suggesting it could run up to 21 months.

This could well prompt Brexiteers to back May's deal on a third presentation to parliament, a move the Prime Minister is expected to make if the deal is voted down on a second outing.

Analysts at global investment bank TD Securities say they believe a variant of May's deal will be approved, but this is likely to come later in March - not next week.

"Sterling remains trapped between the competing tensions of Brexit and the ebb and flow of the domestic economy. For now, Brexit remains the primary driver - by a very large margin. Uncertainty remains extraordinarily high and it is difficult to calibrate our GBP expectations with high precision," says James Rossiter, Senior Global Strategist with TD Securities.

TD Securities say Sterling "faces a more difficult road" going forward as a lot of good news is already incorporated into the exchange rate and markets "may have gotten a little ahead of themselves in hoping for further positive developments."

"With the UK's data and event calendar relatively light until the 12th, we think sterling may start to feel the effects of gravity once again," says Rossiter.

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