Pound Sterling Retreats against Euro on Downbeat Barnier Comments, but Johnson and von der Leyen to Talk Saturday

- Johnson and von der Leyen to try and progress negotiations Saturday
- Comes after Barnier says talks are not on a trajectory to succeed
- GBP softer against EUR but up against weakened USD

Above: Michel Barnier addresses the EU Parliament. Image, Benoit BOURGEOIS, © European Union 2020 - Source : EP.

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The British Pound was mixed heading into the weekend: down against the Euro on comments from the EU's Chief Brexit Negotiator concerning the state of post-Brexit trade talks but higher against a Dollar weakened by developments in U.S. politics.

However, downside against the Euro was limited by a report out late on Friday that UK Prime Minister Boris Johnson will hold a call with the President of the European Commission Ursula von der Leyen on Saturday, ahead of the restarting of negotiations due to take place in London on Sunday.

The call between von der Leyen and Johnson follows a report that the EU's Chief Negotiator Michel Barnier has given a downbeat assessment on the prospect of a post-Brexit trade deal being reached by the EU and UK, a development that will likely keep Pound exchange rates on edge over coming days.

"In a generally gloomy assessment the EU's chief negotiator said the talks are currently 'not on a trajectory' to get a deal and there won't be one unless the UK changes its approach, especially on LPF and fishing where he said the EU has shown willingness to compromise," says Nick Gutteridge, a freelance Brussels reporter currently contributing to The Sun.

Gutteridge has proven himself to be a reliable source concerning Brexit developments over recent years and reports that negotiations remain some way of from conclusion should serve as a reminder to foreign exchange markets that the Pound still has an element of risk attached to it.

Michel Barnier has this week been briefing senior EU figures on the status of talks that were paused on Wednesday. According to Gutteridge has has said the UK side has been pressing for the Brexit talks to be kicked up to a higher political level but he has pushed back, fearing No 10 wants to turn the last few days of negotiations into a 'mass bargaining session'.

"The EU's chief negotiator sees Britain's strategy as trying to orchestrate a 'big tug of war at the end' between Boris Johnson and Ursula von der Leyen/Merkel/Macron during which the three key topics fisheries, LPF and governance would be played off against each other," says Gutteridge, adding:

"The thinking goes a leader level intervention worked for the Withdrawal Agreement, with the PM and Juncker/Varadkar, so why not do it again? Barnier said he's open to a few select topics being passed upward at the very end, but the UK wants to leave as many as 30 issues open."

"I keep telling them that's not going to happen. You can't have things going up to that level that haven't been gone over with a fine toothcomb," a source told Gutteridge.

The Pound has rallied since September in anticipation of a post-Brexit trade deal being struck before year-end, a development that would remove some clouds from the UK's business and political outlook, which would in turn aid the economy.

According to Gutteridge, Barnier allegedly also expressed wariness at the UK's repeated portrayal of the tariff and quota-free deal on the table as 'low value' and just Canada-style. He said this is a communications tactic the EU needs to push back against, and it's actually an economically high value deal.

"He said the Brits hypocritically talk about a simple FTA when it suits them, like on LPF, but in other areas push for much greater access," Gutteridge said, adding an EU diplomat told him "This is not a flimsy trade agreement. This is serious stuff. If all you want is a Canada-style deal, only ask for that.'

The UK side is meanwhile said to be relaxed about such noises coming out of Brussels which they say are always expected after Barnier does his internal briefings.

Barnier and Frost are due to recommence talks on Sunday.

A deadline for negotiations is currently held to be the November 19 meeting of EU leaders, where a final sign-off must happen if the deal is to be passed into legislation by the EU Parliament before year-end.

Should negotiators fail to reach a deal foreign exchange analysts warn the Pound could endure a notable slump in value, particularly in the short-term.

However, should a deal be reached the general assessment is that Sterling can rally. However, as we note here, the upside potential for Sterling looks to be relatively limited given the limits a 'skeletal' trade deal poses to the ease of doing business between the EU and UK.

Furthermore, the UK is said to be facing severe economic headwinds owing to the government-imposed lockdowns and a volatile domestic political landscape.

"The four week lockdown announced by the PM from November 5 has pulled the rug away from hopes of a UK recovery in the final quarter of the year. In turn this has injected fresh life into speculation about the prospects of a negative interest rate from the BoE. This too is likely to cloud the outlook for the pound going forward," says Jane Foley, Senior FX Strategist at Rabobank.

At the time of writing the Pound-to-Euro exchange rate is 0.40% lower at 1.1076 and the Pound-to-Dollar exchange rate is 0.12% lower at 1.3121.