Pound Sterling at Risk of "Sharp Fall" against Euro and Dollar as Brexit Talks Risk Failure

- GBP softer on Thursday as Brexit nerves build
- Johnson-von der Leyen meeting offers no new surprises
- Sunday seen as a new deadline
- But hints that talks could extend into next two weeks

Above: Johnson and von der Leyen, Brussels Dec. 09. Photographer: Etienne Ansotte. © European Union, 2020. Source: EC - Audiovisual Service.

• Market rates: GBP/EUR: 1.1000 | GBP/USD: 1.3300
• Bank transfer rates: 1.0800 | 1.3030
• Specialist transfer rates: 1.0930 | 1.3200
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The British Pound is vulnerable to significant declines after the EU and UK set Sunday as a new deadline for the talks on a post-Brexit trade agreement, although an agreement to keep negotiating offered a ray of hope that a deal can ultimately be reached.

The two sides confirmed they remain far apart on key issues after UK Prime Minister Boris Johnson dashed across the channel on Wednesday night to try and add impetus to stalled talks.

"The pound weakened in the absence of a breakthrough during the talks," says Khatija Haque, Head of Research & Chief Economist at Emirates NBD, "growing Brexit concerns continue to weigh on the GBP."

Johnson met EU Commission President Ursula von der Leyen for discussions over dinner, with the two leaders joined by their lead negotiators.

Both sides confirmed the gaps between them remained substantial.

A statement from the office of the Prime Minister read:

"The PM and Mrs von der Leyen agreed to further discussions over the next few days between their negotiating teams. The PM does not want to leave any route to a possible deal untested.

"The PM and Mrs von der Leyen agreed that by Sunday a firm decision should be taken about the future of the talks."

"We are not confident of a deal because the same three issues (fishing, governance and competition) remain unresolved. The bottom line is the near term risk to GBP/USD is for a sharp fall, something one week risk reversals are increasingly pricing," says Joseph Capurso, Head of International Economics at CBA.

Above: The GBP/EUR rate has pulled back from November highs as nerves build.

The Pound-to-Euro exchange rate is currently half a percent lower at 1.10, the Pound-to-Dollar exchange rate is quoted 0.42% lower at 1.3300 on Thursday.

Despite the sombre tone to proceedings, foreign exchange markets remain relatively unfazed by developments with GBP/EUR trading within a medium-term range and the GBP/USD still in reach of multi-month highs.

However, there is a risk of heightened volatility ahead of the weekend as traders position themselves for a possible weekend failure, or breakthrough, in talks.

"We understand each other’s positions. They remain far apart," said von der Leyen in a statement following the meeting with Johnson. "The teams should immediately reconvene to try to resolve these issues. We will come to a decision by the end of the weekend."

But, looking closely at the details of the statements released on Wednesday night reveals Sunday is not necessarily the 'hard' deadline it is currently being sold as.

A statement from the Prime Minister's office said a decision must be made on "the future of the talks" by Sunday night.

Therefore, Sunday could be another soft deadline and a positive scenario is that the two sides are still talking next week as  the only real deadline in play is December 31, when the transition period ends.

The Telegraph reports diplomatic sources raised the possibility of the Brexit ­negotiations continuing through the Christmas period, with one senior EU ­diplomat telling the newspaper: "miracles usually happen later this month.”

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The UK's parliament can extend its session into the Christmas holiday period in order to accomodate a last-ditch deal. Speaker Sir Lindsay Hoyle told Sky News the House of Commons could sit as late as Christmas Eve should it be required to pass a Brexit bill. Under current plans, the Commons will stop sitting on December 21.

"If needs be, the House is the servant and I am happy as being that servant to ensure we can run, as far as I'm concerned, even up to Christmas Eve," he said.

Mairead McGuinness, Ireland's EU Commissioner, said in an interview on Ireland's national broadcaster RTÉ that "there is a deal to be done".

She said Wednesday's meeting will have clarified where the faultlines in talks lie, "if we take the heat" out of the talks there was "one glimmer of hope" in the EU statement.

"We gained a clear understanding of each other´s positions, qualifying that by saying both sides remained far apart," said McGuinness.

"We never had great expectations that there would be a breakthrough over dinner, but the fact that there was a discussion, lively and interesting...and that there was a clear understanding of each other's positions, doesn't mean that there will be a breakthrough but it's certainly better than a statement suggesting otherwise. I would expect those three very difficult issues will be discussed in detail again to see where a compromise might be found," she added.

EU leaders are meanwhile due to meet for their December summit over the course of Thursday and Friday, however they are not expected to debate Brexit and instead are expected to call for 'no deal' preparations to be ramped up.

The move will be designed to push the UK into final compromises during weekend talks.

Traders will be aware that next Monday's trading session could be a volatile one given a final decision on talks will likely come before markets open in Asia, therefore position squaring on Thursday and Friday this week cannot be ruled out.

Despite the apparent signs of deadlock, that the two sides are still talking is significant. Indeed, we noted yesterday that a positive outcome to talks would be that Johnson and von der Leyen committed to continue negotiations.

On this basis, there still remains the prospect of a deal being reached.

The Pound rallied against the Euro, Dollar and other major currencies in the mid-week trading session as foreign exchange traders expressed 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.

"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," says Joe Manimbo, an analyst with Western Union.