Pound Sterling Jumps on Fresh Brexit Progress Report
Above: Michel Barnier, Chief Negotiator on Brexit for the EU. File image © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus
- Pound-to-Euro exchange rate: 1.1579, up 1.24%
- Pound-to-Dollar exchange rate: 1.2788, up 1.45%
- "Cautious optimism" on state of talks
- But, negotiations might have to be extended
- Talk of late-October emergency EU Council being convened
U.K. and European Union negotiators in Brussels are closing in on a draft Brexit deal with optimism that there will be a breakthrough before the end of Tuesday, according to two EU officials, Bloomberg News reports.
The brief headline from the newswire saw Sterling exchange rates pop across the board, with traders betting the two sides have done enough for European leaders to sign off on a new deal at this week's European Council summit, slated to start on Thursday.
If the reports of progress are true, then there is a high probability that MPs will be asked to vote on a deal this Saturday.
The Pound rallied across the board on the news, and is now delivering fresh multi-week highs against the Euro, Dollar and nearly all major currencies.
Above: Sterling is the best-performing major currency today
"Sterling jumped to its strongest in four months against the US dollar and cleared a big technical level as reports said UK and EU negotiators are closing in on a draft Brexit deal," says Neil Wilson, analyst with Markets.com. "These kind of reports expose just how vulnerable sterling is to headline risk. At present these are unconfirmed reports and need to be verified – we just have Bloomberg citing two people with knowledge of the talks."
Indeed, a senior EU source tell Reuters that talk of an imminent Brexit deal as per the Bloomberg report are "way too premature", adding that it is "spin".
EU and UK negotiators are working on a solution to the vexing question of the Northern Ireland border, and according to The Telegraph a Brexit deal appears to be taking shape after sources on both sides of the Channel said a positive day of negotiations on Monday had yielded a potential solution to the Northern Irish border problem.
Sources in Brussels and London told the newspaper there was "cautious optimism" that a narrow path to a deal could now be appearing, which suggests a more upbeat tone from the assessment made by the EU’s chief negotiator Michel Barnier on Sunday.
While Barnier told journalists in Luxembourg today that a deal is still possible this week, he did however say the UK must now produce a legal text.
The EU has apparently told UK Prime Minister Boris Johnson to make new concessions by midnight or there will be no Brexit deal at this week’s summit.
"The ultimatum means that unless David Frost, Mr Johnson’s lead negotiator, gives Brussels a new legal text setting out the government’s alternative to the Irish backstop, talks will continue into next week, leaving the Conservative leader with no deal to unveil this weekend," reports The Times.
The Bloomberg headline suggests those concessions have been forthcoming.
If a deal is not struck today, the prospect for a late-October emergency EU Council Summit comes into play.
We would therefore urge readers to be wary of any disappointments on this front that might take the shine of Sterling.
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The Pound saw sizeable gains last week as the mood music around Brexit talks improved markedly, but headlines on Sunday and Monday reminded markets that there was much work to be done, and Sterling pared some of those gains at the start of the new week.
We maintain our long-held position that if talks are still ongoing by the time the EU Council summit comes around on Thursday, then a deal will be a highly-probable outcome. However, any requirement for more time could muddy the outlook somewhat.
.@MichelBarnier #GAC50:
— Daniel Ferrie (@DanielFerrie) October 15, 2019
????Our team is working hard.
????Even if an agreement is difficult [...], it is still possible this week.
????Agreement must work for everybody: the whole #UK & whole #EU.
????It is high time to turn good intentions into a legal text.https://t.co/zzhubWPGSn
Time remains extremely tight for both sides to hammer out a new deal, and it is reported that the EU are considering a second summit, before month-end, at which a final deal might be struck.
This week's Thursday-Friday summit of the European Council appears to be too soon for negotiators to seal a workable solution to the UK's complex proposals that seek to ensure no customs checks are required on the island of Ireland, and an emergency summit could be agreed to be held at the end of October according to reports.
EU negotiators have said they will not want to be negotiating at this week's summit itself, and therefore some kind of deal must be struck by tomorrow for a deal to be placed on the European Council's agenda.
"Even if a deal is not agreed by the time of the EU Council, that is not the end of the matter. The real ‘hard’ deadline for the EU and UK to strike a deal is October 31st, the date of the UK’s scheduled departure," says Peter Schaffrik, Global macro Strategist with RBC Capital Markets in London.
"Sign-off on a deal, if there is one, may only come close to Brexit day. For example, in April, the decision to grant the UK an extension came just two days before its (then) scheduled exit date," adds Schaffrik.
The Prime Minister of Finland, Antti Rinne, who holds the EU’s rotating presidency, told a news conference on Monday he thinks "there is no time in a practical or legal way to find an agreement before the EU Council meeting. We need more time."
Ireland's foreign minister Simon Coveney was in Brussels on Monday and also gave strong hints that more time was needed to negotiate:
“I think it’s too early to say, even though we’re only a few days away from the summit. It’s too early to say whether it’s possible to get a breakthrough this week or whether it will move into next week."
Ulrich Leuchtmann, a foreign exchange strategist at Commerzbank in Frankfurt, agrees with the notion that Brexit negotiations might have to extend beyond this week, and this could keep the Pound in check around current levels:
"We are unlikely to see a deal at the EU summit this week. That does not have to be the end yet, another EU summit on 29th/30th October is already being discussed. At least until then the risk of something going wrong remains in place though. And until then Sterling will tend to struggle justifying last week’s optimism."
Sterling might find itself entering a 'holding pattern' around current levels if negotiations have to extend.
Above: Sterling is in an uptrend against the Euro, but a fresh catalyst must transpire if a fresh break higher is to be delivered.
The only complication arising from a scenario whereby it is agreed that negotiators need more time, is that Prime Minister Boris Johnson is legally obliged by the Benn Act to ask the EU for an extension if no deal has been approved by October 19.
Hence, even if there is scope for negotiations, it is unclear whether the Prime Minister would be able to negotiate based on UK law which has given him a defacto deadline of this weekend.
We therefore enter a situation whereby the Benn Act has not just become a guarantee against a no deal, but it has also become a hinderance against a deal.
This is significant for the outlook of the Pound: we remain of the view that a deal would be a best case scenario for Sterling and would unlock some decent upside potential.
A Brexit delay would however potentially see Sterling retrace recent gains and go lower as markets will take the view that a Brexit delay only kicks a 'no deal' Brexit further down the road.
It could be the case that Johnson agrees with EU leaders to extend discussions at this week's summit, thereby putting the UK Parliament under pressure to agree to extend negotiations.
We would imagine the Government would on Saturday put before Parliament a request to allow it to continue negotiating on a deal, effectively giving MPs a choice to either kill the Brexit talks or come up with a fresh piece of legislation that will force the PM to ask for a Brexit deadline on the cusp of the October 31 deadline.
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