With a Decision on Brexit Looming, Pound Sterling Looks to Recover Sharp Losses against Euro and Dollar at Start of Key Week

- Brexit talks enter final days
- Sizeable downsize move expected if talks fail
- Upside gains on a deal could however be limited

Comments by UK Foreign Sec. Raab (left) are in focus on Monday. File image. © European Union, Source: EC - Audiovisual Service / Photo: Lukasz Kobus

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The British Pound starts the new week with some modest gains against the Euro, Dollar and other major currencies, but the gains are modest relative to the sharp decline witnessed on Friday.

The Pound fell sharply against most its peers as it was revealed the UK and EU faced significant hurdles to agreeing a future fisheries pact, something which is required to get a broader trade deal agreed before year end.

The EU was said to be willing to offer up 15-18% of their fish quota, something immediately dismissed as being derisory by sources on the UK side quoted by national media outlets.

"On fishing there's a point of principle: as we leave the EU we're going to be an independent ... coastal state and we've got to be able to control our waters," UK Foreign Secretary Dominic Raab said during a Sky News interview on Sunday. "We can talk about transitions and things like that and we recognise the impact it has on other countries around Europe. But that principle comes with sovereignty, comes with leaving not just the EU but the transition period and I think the answer is can the EU accept that point of principle which comes with us leaving the political club."

The Pound fell sharply amidst growing anxieties on the lack of progress in talks, with some market participants becoming nervous that the scale of the divide over future fishing rights was too large to be bridged.

The Pound-to-Euro exchange rate - the exchange rate which gives the clearest indication of Brexit sentiment - fell 0.75% to close at 1.1131, it is at 1.1150 on Monday. The Pound-to-Dollar exchange rate fell by a lesser degree to close at 1.3308, it has since edged higher at the start of the new week to quote at 1.3348.

Despite the near-term pullback, downside in the Pound is likely to be limited as long as markets hold a view the chances of a deal are more likely than not.

"Sterling remains close to the top end of its recent trading range against the euro and has been firm against the dollar, suggesting that markets remain optimistic about the likelihood of a deal," says Nikesh Sawjani, an economist at Lloyds Bank.

Indeed, Raab acknowledged talks are in their "last week or so" and that "I do think we're in a reasonable position – there's a deal to be done.”

"If you look really at what the outstanding issues are, of course the level playing field, but it feels like there is progress towards greater respect for what the UK position was," added Raab.

Ireland's foreign minister Simon Coveney has come out on Monday and said securing a deal this week is crucial.

"I do think a deal is possible but it needs to be finalised this week. We really are running out of time," said Coveney.

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"Time is running out in the trade negotiations between the UK and EU with both parties stressing that difficult issues remains but also willingness to keep negotiating. We still see an agreement as the most likely scenario on the very fact that an exit with known disruptions is preferred to an unknown disorderly one," says Marcus Widén, Economist at SEB.

The Telegraph reports President of the European Commission, Ursula von der Leyen, has started to "lean on" EU Chief Negotiator Michel Barnier to agree a deal with the UK. "She is said to be putting pressure on Barnier to find a way through the stalemate."

A source from the UK side told the newspaper von der Leyen was now being "quite helpful" and was "keen to unblock things." The Commission has apparently dispatched Stephanie Riso, one of its most senior officials, to help Barnier.

Riso was involved in the original Brexit divorce negotiations and is viewed as someone who could help break the deadlock, according to The Telegraph, adding that UK Prime Minister Boris Johnson could speak to von der Leyen in the first half of the week to try to hammer out a way forward on fishing rights.

As things stand there is no phone call scheduled between Johnson and von der Leyen, Politico reports on Monday, "talks are at such a crunch stage, there's no formal agenda for what will be discussed and when this week, with both sides taking each day as it comes."

There is a chance talks run into next week, when EU leaders meet for the European Council summit. "Some observers are saying that a deal must be done this week to allow time for votes in the UK and European parliaments before year-end. However, reports also suggest that preparations are being made for emergency voting sessions post-Christmas," says Sawjani.

"Our base case remains a deal but we will be more concerned if there is no deal next week either. The EU summit on 10-11 December seems like the last meeting where EU leaders can approve a deal, so both the EU and the UK have only very limited time to make up their minds," says Jakob Ekholdt Christensen, Chief Analyst at Danske Bank.

The Pound is widely expected to rally in the event that a deal is reached between the EU and UK, although the scale of any gains is up for debate with a number of analysts we follow saying upside is likely to be limited.

"What could trigger a much clearer market reaction is a deal on Brexit, but at this point a compromise may just spark a modest relief rally on sterling against both the USD and
EUR," says Roberto Mialich, FX Strategist at UniCredit Bank in Milan. "Brexit disruptions once the UK leaves the EU common market and the custom unions on 1 January are still viewed as a drag on the British economy and on the currency."

Should talks fail, the Pound is widely expected by analysts to fall sharply.

"Traders will be better positioned for news that may lift sterling and less prepared for any sell-off, limiting gains and exacerbating any decline," says Jeremy Boulton, a Reuters market analyst. "That's reflected in current speculation. Bets on the pound's dropping are small compared with those established before the two other big Brexit deadlines that have passed."

"The pound's performance has also radically changed," adds Boulton. "Before the March 2019 deadline, GBP/USD dropped 6.6% over 15 weeks. It fell 10.6% in the 25 weeks before the October 2019 deadline. In the last 36 weeks, GBP/USD has rallied 16.7%."