The Pound is Softer after Brexit Deal Euphoria is Replaced by Steely Caution
Image © European Union , 2018 / Source: EC - Audiovisual Service / Photo: Mauro Bottaro
- EU's Barnier says a lot more progress required to secure deal
- Sterling softer as Brexit negotiators face further challenges
- Negotiators look for way forward on Northern Ireland customs question
- Further UK concessions lessen likelihood of deal passing Parliament
Monday sees the British Pound pare some of the impressive gains recorded last week, amidst news that a Brexit deal between the EU and UK still remains some way off.
Sterling leapt to fresh multi-month highs against a host of currencies last week on signs the UK and EU were prepared to make a concerted push to deliver a deal, however reports out Monday suggest weekend negotiations between the two sides have yet to yield any progress.
A more measured tone on Brexit negotiations, and the flushing out of bets against Sterling from the market (when bets against a currency are closed, that currency is bought), have combined to pull Sterling back down from recent highs.
The Pound-to-Euro exchange rate is quoted at 1.1435, having been as high as 1.15 last week. The Pound-to-Dollar exchange rate is quoted at 1.2614, having been quoted as high as 1.2707 last week.
Talks will resume today, and for EU leaders to sign off on a deal at the European Council summit, a legal text would need to be agreed by Wednesday.
EU officials and diplomats are playing down prospects for a breakthrough in the coming days, with one senior figure saying a deal at the summit would be "ambitious", says Tony Connelly, Europe Editor for Irish state broadcaster RTÉ.
"Following two days of intensive talks the two sides are still far apart on customs. The EU side continues to have grave concerns about the UK proposals to keep NI in the UK customs territory, with Theresa May's old Customs Partnership idea being recycled and adapted for NI," says Connelly.
In light of developments it appears markets will be prepared to adopt a wait-and-see approach to Sterling before making any major directional decisions on the currency ahead of the crunch European Council summit starting on Thursday, where it will be known if the two sides have struck a deal.
"The European Commission's Chief Negotiator Michel Barnier indicated the talks had not made enough progress to be the basis for an agreement, weighing on GBP," says Kim Mundy, foreign exchange strategist with Commonwealth Bank of Australia.
"If Johnson can’t seal a Brexit deal (with the EU or in the UK House of Commons) by Saturday 19 October, the Brexit delay bill (the Benn Act) requires him to ask the EU to postpone Brexit by three months to 31 January 2020. In this scenario, GBP/USD will likely trade lower closer to 1.2200," says Mundy.
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"Sterling has softened as complicated Brexit negotiations have yet to produce a result. The lack of progress has just taken the shine off things a touch but the market remains ever hopeful and there’s support as long as talks are still going," says Neil Wilson, analyst at Markets.com.
The apparent road block facing negotiators are the UK's latest proposals to solve the complex Northern Ireland border question by keeping Northern Ireland in both a UK and EU customs territory, thereby avoiding a 'hard' border on the island of Ireland.
But how can you keep a country in two customs territories at once? Easy, suggest the UK: according to RTÉ's Connelly, Northern Ireland will be in the UK customs territory, but operating the EU's rules and procedures on tariffs and quotas.
"If goods are going from GB to NI-only they pay the EU tariff and importers get a rebate on the difference between that and the UK tariff. If the goods go on to cross the border south then the EU tariff is the correct one," says Connelly
This does appear to be a complex proposal, and following a briefing by the EU's lead Brexit negotiator Michel Barnier to EU27 ambassadors, the main problems are:
- the system of rebates is very complex
- the plans won't be ready by the end of the transition
- it's not clear how you ensure goods that are destined to remain in NI stay in NI
At this stage, we would not be surprised by the reactions of the EU as a complex question such as Northern Ireland requires a complex answer, as the EU are finding.
"After 'constructive' but inconclusive negotiations over the weekend, we may learn within the next two days whether the UK and the EU27 are moving closer to a deal for an orderly Brexit on 31 October," says Kallum Pickering, an economist with Berenberg Bank in London. "Striking a deal in time for the EU summit on 17-18 October and getting it passed by the UK parliament in an extraordinary Saturday session on 19 October poses a huge challenge with a highly uncertain outcome, to put it mildly."
Berenberg's base case remains that a deal won’t be finalised in the next few days and that the UK will have to ask for a Brexit extension beyond 31 October.
The Times reports on Monday that the EU are asking for further concessions of the UK. Barnier apparently told David Frost, Prime Minister Boris Johnson's negotiation representative, that if a deal were to be struck the UK would have to give further ground on a customs agreement for Northern Ireland.
"In a move that will put more pressure on No 10, the EU said that it was prepared to back the plan in principle even if a legal text could not be finalised in time for the summit - provided that Mr Johnson gave ground," says Oliver Wright, Policy Editor at The Times.
The demand for further concessions could be significant in that the UK have very little space to give away if the Government is to command a majority to get any deal that is struck with the EU through Parliament.
The Government needs the Northern Ireland unionist party, the DUP, to vote for a deal, as well as a tranche of around 30 Conservative MPs that consistently voted down Theresa May's Brexit deal.
In addition, the Government must win ex-Conservative MPs and some opposition party MPs if a deal is to pass this Saturday. "The more Boris gives ground to the EU, the harder the sell to the ERG and DUP. Labour seems all but certain to block whatever the government agrees with EU," says Wilson.
If the UK concedes further ground to the EU, there is a real risk that the final deal put before the House of Commons loses the support of the DUP and Conservative Brexit 'purists'. It is therefore of little wonder that a number of foreign exchange analysts are expecting any deal struck by the EU and UK to fail in the House, an outcome that would likely trigger another Brexit extension and months of further certainty as the UK heads to a snap General Election.
"Once a Brexit date extension has been secured, early UK general elections are expected to be triggered provided conditions for a general election are met, and take place late November. GBP will then wax and wane with UK polls of voting intentions," says CBA's Mundy.
Sterling might have run higher last week as the prospect of a deal increased, but it appears markets will now want solid details and proof that anything struck between the EU and UK can pass Parliament before bidding Sterling any higher.
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