Pound Sterling Today: Johnson Looks for Brexit Progress in New York, ING say Optimism Misplaced & see Losses Ahead vs. Euro and Dollar

Above: Boris Johnson. File image. © Gov.uk

- Barnier dismisses UK proposals

- Johnson to push Brexit agenda on sidelines of UN General Assembly

- Sterling holds recent levels vs. Euro and Dollar

- ING warn a Brexit deal unlikely before Oct 31. See Sterling downside

Sterling starts the new week off on a softer tone, with declines following comments made by the EU's chief Brexit negotiator that the UK's most recent proposals on unlocking the stalemate are not good enough. 

Comments from EU Chief Negotiator Michel Barnier out Monday underlined the distance the UK and EU must travel to close the outstanding gap with the Reuters newswire quotes Barnier as saying the UK's latest proposals on the Northern Ireland border remain unacceptable.

He adds it is hard to see how the alternative arrangements to the contentious 'backstop' will go far enough to erase the need for that backstop.

Barnier adds there is currently no basis on which to form a deal, but that both sides will continue to talk. The comments coincide with a turn lower from recent highs by Sterling, that sees the GBP/EUR exchange rate quoted at 1.1299, while the GBP/USD exchange rate is quoted at 1.2419.

The British Pound last week rallied to multi-month highs amidst growing expectations for a Brexit deal to be struck before October 31, and this week UK Prime Minister will meet his European counterparts in New York to try and make further progress.

Johnson arrived in New York on Sunday, and said he is "cautiously optimistic" he can agree a revised Brexit deal. The Prime Minister will meet Germany's Chancellor Angela Merkel, France's President Emmanuel Macron, Ireland's Taoiseach Leo Varadkar and Donald Tusk, European Council President.

The talks will be held on the sidelines of the UN General Assembly and come as momentum over the prospect of a fresh deal being struck has grown over recent days.

"Our central base case is that a deal will eventually emerge, which would be supportive for the GBP over the medium term. There is increasing discussion of Conservative party dissenters being persuaded to vote for any deal, even if it may prove remarkably similar to that already thrice rejected," says Jeremy Stretch, FX strategist with CIBC Capital Markets.

Germany's foreign minister Heiko Maas has today given comments on the status of Brexit talks, saying the proposals presented by the UK to the EU last week "were a step forward".

He adds Germany remains of the belief that an orderly Brexit is still positive.

But any major breakthrough, and therefore rally in Sterling, are unlikely this week.

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Indeed, ahead of his engagements, Johnson warned the chances of a breakthrough this week are low. But the downside in the currency is also relatively well protected as we would suggest markets agree with Johnson's view and therefore don't envisage any major Sterling declines on the likelihood that Johnson returns to London empty-handed.

"Expectations of a breakthrough in New York are low," says Derek Halpenny, an analyst with MUFG. "Hence we wouldn’t expect any notable GBP selling on a failure to even make progress. Leveraged short GBP positions are already somewhat elevated."

The EU do however continue to warn the two sides are still far apart on the issue of the Northern Ireland border question, and one noted investment bank warns optimism on the Pound might therefore be misplaced.

ING Bank N.V. - the Dutch-based global financial services provider - says expectations for a new Brexit deal being reached are "likely overdone". "We suspect markets have partly overreacted to the comments, especially considering that the main EU countries involved in the negotiations (France, above all), have not shown a similarly optimistic tone of late," says Francesco Pesole with ING in London.

The call suggests the Pound's recent run higher is at risk of reversing.

Sterling has been rising against the Euro and other major currencies since mid-August, when markets started to pare back expectations for a 'no deal' Brexit taking place on October 31, following moves by the UK parliament to prevent such an outcome.

The rally has since gathered steam amidst signs Prime Minister Boris Johnson might yet succeed in securing a Brexit deal.

For foreign exchange analysts, a Brexit deal being struck between the EU and UK represents a positive outcome for Sterling as it removes the thick layers of uncertainty currently choking business investment, which would in turn allow the economy to pick up fresh momentum.

Expectations for a Brexit deal were given a decisive boost late Thursday when EU Commission President Jean-Claude Juncker told Sky News that the Northern Ireland backstop clause could in fact be replaced.

Previously, the EU had maintained a firm line that the Brexit deal's Withdrawal Agreement and Northern Ireland backstop were not up for renegotiation.

However, Johnson's dogged attempts to remove the backstop appear to be paying off.

Yet, ING analysts are not convinced the two sides will reach a compromise.

"We continue to see the chances of a new Brexit deal as limited, which leads us to believe that the rally in Sterling may be short," says Pesole.

ING analysts are forecasting the Pound-to-Dollar exchange rate to trade at 1.17 in one month's time, ahead of a recovery to 1.22 in three months and 1.25 in six months.

ING forecasts the Pound-to-Euro exchange rate to trade at 1.0526 in one month, 1.0870 in three months and six months.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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