Pound Sterling "Could Edge Higher" on Commitment to Intensify Trade Negotiations

- Brexit negotiations to intensify over coming weeks
- GBP has firmed on signs of progress
- But short-term volatility likely to remain elevated.
- France said to be key to unlocking fisheries deal

Above: EU Commission President von der Leyen. Photographer: Etienne Ansotte, Image © European Union, 2020. Source: EC - Audiovisual Service

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The British Pound is firm at the start of the new week and is trading at levels consistent with a more optimistic market view on the prospect of a post-Brexit trade deal being reached between the EU and UK.

Sterling rallied last week on news that further progress had been made in talk and is expected to hold the recent advance on weekend news that the UK and EU will step up top-level interactions to make further progress over coming days.

"No escalation in tensions and hints that negotiations are to continue should be enough to help the Pound," says Francesco Pesole, FX Strategist at ING Bank N.V.

UK Prime Minister Boris Johnson and the President of the European Commission Ursula von der Leyen, agreed on Saturday to intensify Brexit talks to close "significant gaps", raising market expectations for a deal given a view that there remains significant political will on both sides to find answers to the vexxing questions on fisheries and state aid.

The Pound-to-Euro exchange rate is seen at 1.1028 on Monday having risen 0.77% last week on the improved mood music between the two sides, meanwhile the Pound-to-Dollar exchange rate is at 1.2933 having risen 1.50% the week prior.

"Upward momentum has improved a tad and GBP could edge higher," says Quek Ser Leang, an analyst with UOB. Leang adds that while the underlying tone appears to have firmed, "a sustained advance can be expected. At this stage, the prospect for such a move is not high". If you would like to secure current rates for use in the future, or automatically book an ideal rate you are aiming for when it is achieved, please learn more here.

Von der Leyen and Johnson agreed on the importance of finding an agreement in a joint statement issued following their call.

"They endorsed the assessment of both Chief Negotiators that progress had been made in recent weeks but that significant gaps remained, notably but not only in the areas of fisheries, the level playing field, and governance," read a statement. "They instructed their Chief Negotiators to work intensively in order to try to bridge those gaps."

This week will also see EU Chief Negotiator Michel Barnier travel to Berlin and then later in the week to London, to try and progress negotiations.

"The fact the two leaders didn’t issue a joint statement trumpeting the details of compromise solutions already being worked on doesn’t mean they can’t or won’t happen. Fact that the Prime Minister and von der Leyen will be in regular contact now is significant. Lots more to-ing and fro-ing predicted," says BBC Europe Editor Katya Adler. "It would seem neither the wildly positive sounding rumours out of the U.K. last week on agreed solutions being found to state aid, nor the doom and gloomsters saying nothing is going nowhere fast on tough issues in talks following the Johnson-von der Leyen phone call this week are correct."

The Pound has entered a period of heightened sensitivity to Brexit-related headlines and last week showed significant reactions to newswire reports where officials had briefed journalists anonymously. This makes trading the Pound difficult as it can react to news with wafer-thin credibility.

In short, this is a volatile headline driven currency at present and we might see further such volatility over coming days.

"We think Brexit issues will remain a tactical volatility driver for Sterling, especially during times when it is topical," says Ned Rumpeltin, a foreign exchange strategist at TD Securities. "We think the “shock value” of failing to reach a deal by the end of the year will see GBP weaken."

TD Securities are however holding a base case assumption that a deal will eventually be agreed between the two sides at some point in coming weeks.

"Looking at 2021-Q4 as an anchor, we are fairly bullish on sterling on a longer-term basis with a forecast of 1.38. In a harder Brexit scenario, we think sterling would still recover, but more slowly. We would want to see how the dust settled, but we would not be too surprised if sterling managed to end next year around 1.30-1.32. For reference, our models currently pin GBP/USD’s long term fair value at 1.51," says Rumpeltin.

Expectations for progress in trade talks grew last week on a news report that said UK officials had turned notably more optimistic on the chances of success, saying their expected odds of reaching a deal have risen to 70%, a notable improvement than the 30% chance they held heading into September.

The Financial Times reports Barnier is set to hold bilateral talks with ministers from the EU's key fishing states to identify ways to break the deadlock with the UK over the sector and accelerate efforts towards a trade deal with London.

Fishing is one of the outstanding issues that is preventing a deal being done with France being understood to be pushing for the current status quo of full access to British waters remaining intact following Brexit. This is at odds with the UK's desire to take back full control of its waters and increase the share of fishing stocks made available to domestic fishing fleets.

Bloomberg reports on Monday that French President Emmanuel Macron’s reluctance to make concessions on fish is stirring concern among officials he could sink efforts to reach a wider trade accord as negotiators begin on Monday a two-week period of intense talks.

It is reported that Barnier will discuss Brexit with German Chancellor Angela Merkel in Berlin on Monday, "a sign the bloc is weighing where it can and can’t make concessions. But officials say Macron holds the key if the EU’s position is to soften. Most EU countries and the European Commission, which is negotiating with the U.K. on the bloc’s behalf, are known to favor a softer position than Macron and fear that his hard-line stance could scupper chances of a wider deal."

The UK also sees fisheries as one area where it does hold an advantage, something that will be leveraged right until the end of talks.

According to the FT, three key issues remain unresolved: how shared stocks will be divided; EU access rights to British waters; and how frequently the two sides’ respective allocations of the shared stocks are recalculated.

Frost on Friday warned that the gap between the two sides on the matter of fisheries was "unfortunately very large" as he called on the EU to shift its position.