Pound Sterling "Resilient" Ahead of Johnson-von der Leyen Dinner

- GBP to maintain choppy sideways range
- von der Leyen-Johnson dinner is day's main event
- GBP resillience says market still expects a deal
- But talks could run for days yet

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

• Market rates: GBP/EUR: 1.1094 | GBP/USD: 1.3411
• Bank transfer rates: 1.0883 | 1.3136
• Specialist transfer rates: 1.1016 | 1.3318
• More about bank-beating exchange rates, here

The Pound rallied against the Euro, Dollar and other major currencies in the mid-week trading session with foreign exchange traders expressing a guarded confidence that a meeting between UK Prime Minister and EU Commission President Ursula von der Leyen would inject some fresh momentum into stalled negotiations on a free trade deal.

The duo will meet at 19:00 GMT and will be joined by their principle negotiators.

A deal won't be struck at the dinner, but a committment to continue negotiating would be taken as a signal that enough has been done to close in on an agreement.

"Sterling notched its first gain of the week, a sign of underlying confidence in Britain and the EU reaching a last-minute Brexit deal that avoids market turmoil and tariffs next year. Negotiations may hinge on a dinner meeting tonight between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen. Sterling should serve as a barometer in prospects of a deal," says Joe Manimbo, an analyst with Western Union.

Despite talks of deadlines and numerous 'make or break' moments, what is becoming abundantly clear is the only deadline that appears to have any credibility is December 31, when the transition period legally finishes.

Therefore, those awaiting either higher or lower Sterling conversion rates might have to show further patience as talks could effectively run for three more weeks as neither side is keen to be seen to have ended talks.

The mood music surrounding talks has this week turned downbeat, with EU Chief Negotiator Michel Barnier telling the EU's General Affairs Council (GAC) on Tuesday that he was not optimistic on a breakthrough.

More EU states are said to be calling for 'no deal' contingency measures to be brought forward, and there is some suggestion - not confirmed - that these measures will go before the College of Commissioners on Wednesday, according to RTÉ's Europe Editor Tony Connelly

"Barnier said to the GAC, we're at a tipping point and it's now tipping in the direction of no deal, and the contingency measures will add to this," a source present at the meeting told Connelly. "The focus is now increasingly here on no deal."

"I'm not sure London has grasped the extent to which a number of member states, even ones normally sympathetic to the UK, are now looking at no deal. There's quite a bit of momentum to no deal," added the source.

"Gauging how much the recent downbeat comments are part of negotiating tactics or truly indicate a widening gap between the two parties is hard to know. What is clear is that there is hardly any time left for further talks and markets will likely require some positive news from Brussels today to retain their optimistic stance on a deal," says Pesole.

The Pound-to-Euro exchange rate is currently settling back above 1.10 and is at 1.1090 in mid-week trade while the pound-to-Dollar exchange rate is back above 1.34.

Both exchange rates fell sharply at the start of the new week as anxieties on the status of talks began to build. "Sterling remains highly exposed to the downside if the prospect of no deal becomes even more realistic," says Francesco Pesole, FX Strategist at ING Bank N.V. in London.

"The relatively resilient GBP, close to its highs for the year, suggests the market is still hoping for the best, if not this week then in the subsequent period. Deadlines have come and gone and it appears the market will be tolerant of more slippage on the deal’s timeline, even into 2021. Yesterday’s sharp bounce back in GBP shows this attitude will likely sustain a “buy on dip” approach," says Daragh Maher, Head of U.S. FX Strategy at HSBC in New York.

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Ahead of the Johnson-von der Leyen meeting Germany's Chancellor Angela Merkel said she believed a deal was still possible, although the main sticking point preventing an agreement was the 'level playing field'. The UK wants the freedom to diverge from EU rules on how much government can intervene in the economy and support businesses, the EU wants the UK to follow their rules. The matter is one of sovereignty for the UK while the EU is keen to avoid a strong competitor on its doorstep. 

The UK's most senior minister Michael Gove said in a radio interview on Wednesday he believed a deal was possible, as did Ireland's Deputy Prime Minister Leo Varadkar.

The Pound rallied on Tuesday after the EU and UK announced they had reached agreement on implementing the Withdrawal Agreement, which is the treaty agreed between the two sides in December 2019.

The agreement on the Withdrawal treaty means the UK has agreed to bin domestic legislation it was planning to pass that would have undermined the treaty if ever exercised.

The move upset the EU and soured relations and the step by the UK is seen by political commentators as a notable overture to try and improve relations and make progress towards a deal.

"Essentially, the UK and EU have been in parallel negotiations over both a trade deal, which has been more in focus lately, and the implementation of the 2019 treaty over the Withdrawal Agreement and Irish Protocol to avoid a hard border with Norther Ireland. It's this second negotiation that has now been ostensibly resolved, potentially paving the way for a broader trade deal in the days to come," says Mathew Weller, Global Head of Market Research at GAIN Capital.

Above: GBP/USD jumps on Withdrawal Agreement breakthrough

The development on the Withdrawal Agreement is critical in more than one way, not only does it make a post-Brexit deal more likely, but it also means a worst-case 'no deal' Brexit outcome for the Pound now looks to have been avoided.

For Sterling, not only is there a 'deal'/'no deal' consideration, but there are also different shades of a 'no deal' for markets to consider.

An amicable 'no deal' would understandably be less detrimental to Sterling valuations than a messy split.

Researchers at Capital Economics identify a "cooperative no deal" and an "uncooperative no deal".

In a "cooperative" outcome both sides would work together to minimise the negative impact of a 'no deal', while under an "uncooperative" outcome the UK and EU would fall into a series of legal spats and "completely fall" out, according to Thomas Pugh, an economist at Capital Economics.

An "uncooperative" outcome would have likely have resulted from the UK passing domestic legislation that would have undermined the Withdrawal Agreement.

Under such an outcome the Pound-to-Dollar could go down to 1.15 while the Pound-to-Euro could fall to below parity to 0.96, according to Capital Economics.

The sealing of a deal on the Withdrawal Agreement and the burying of tensions over the Northern Ireland protocol would make it a great deal easier for the two sides to try and minimise the impact of a 'no deal' outcome and avoid a protracted political stalemate in 2021.