Pound Sterling "Sky-rocketed out of the Gates" against Euro and Dollar, Progress on Level-Playing Field Aids Talks Optimism

- GBP up on renewed optimism for a deal
- Market unwinds last week's negativity
- Progress made on level playing field say reports
- Barnier says fisheries is where major blockage exists

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The EU and UK are closing in on a post-Brexit trade deal and the Pound has responded by going higher, however a decisive conclusion to the negotiations is required to prompt a meaningful rise in the UK currency.

The latest news from those political journalists with an 'inside edge' on negotiations shows that compromises have been made on the handful of areas where disagreement had all but stalled negotiations last week, leading to renewed hopes for a deal.

The Pound jumped into the new week as a result, and further gains are likely according to foreign exchange analysts.

"Sterling sky-rocketed out of the gates at the Sunday open after EU/UK Brexit negotiators failed to reach an agreement over the weekend, but agreed to go the extra mile," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada. "We think the marketplace is now simply purging some of last week's no-deal Brexit hedges as traders are forced to re-price for the possibility of a last-minute deal."

EU Commission President Ursula von der Leyen said in a briefing at the start of the new week "movement" had been achieved in talks and discussions were in the "very last mile", a marked departure from the downbeat tone she expressed last week.

The Pound-to-Euro exchange rate rose sharply to go back above 1.10 and quote at a high of 1.1054. The Pound-to-Dollar exchange rate rose by over a percent to quote at 1.3436.

"Brexit is such a sensitive subject for the Pound that the bar is set low to inspire moves both to the upside and to the downside. Sterling’s behaviour suggests that markets are priced for some sort of trade agreement ahead of the next phase in relations that are expected to begin on January 01," says Joe Manimbo, Senior Market Analyst at Western Union.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

It is reported that the key breakthrough in talks over recent days has been the UK's acceptance that it must align itself to EU competition rules, known as the 'level playing field'. The desire in Brussels is to lock the UK to their standards and rules to ensure the UK does not gain a competitive advantage while enjoying tariff-free access to the single-market.

But UK Prime Minister Boris Johnson said the problem with the EU's proposals was that the EU could unilaterally decide to tighten its standards in these areas in future and act against the UK were they to refrain from adopting these rules. Furthermore, the EU wanted the sole right to dictate the tariffs it would impose were the UK to not keep up with the rules.

EU Chief Negotiator Michel Barnier told EU ambassadors at the start of the week the UK had for the first time acknowledged it would need to accept level playing field provisions, which to Barnier was key to unlocking progress.

However, the EU have themselves had to make concessions on the matter in order for the UK to accept this point.

According to a report by The Sun's Nick Gutteridge - a journalist with a strong record on covering the negotiations - the EU have eased their demands.

It is reported that the EU will agree to an independent arbitration system to resolve any disputes, removing the unilateral right of the EU to sanction the UK.

EU Chief Negotiator Michel Barnier has apparently accepted the EU could take retaliatory measures against the UK if it diverged from EU standards but that it would not be "autonomous", in other words, before taking action there would need to be some dialogue with the UK.

"It's the operationalisation of that principle that is now under discussion," according to Irish national broadcaster RTÉ's Europe Editor Tony Connelly.

The EU see this is progress as for a long time the UK refused to accept that if they diverged the EU had a right to do something, a source told Connelly. "That principle has now been accepted, but how it is implemented is the nub of the discussion."

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From the EU perspective the concern is the UK might change its rules to make it more competitive, says the source, but "Barnier seemed positive that the principle of counter-measures had been agreed."

Movement has allowed investors to anticipate the prospect of a deal being reached before year-end.

The Pound jumped by over a percent against the Euro, Dollar and other major currencies at the start of the new week following a decision by the EU and UK on Sunday to extend negotiations, leading investors to increase bets that a deal between the two sides was likely.

"Brexit uncertainty remains at the forefront of market concerns. We think a cliff-edge deal still seems likely, but the risk of an accident remains. Beyond this, GBP has little Brexit premium to price out while the cyclical story sits on a weak foundation. Though a knee-jerk positioning squeeze could ensue on a deal, we like the risk/reward of fading rallies above 1.35. A no-deal marks an utter collapse in GBP and a potential trigger to reverse the static optimism priced across markets," says Mark McCormick, Global Head of FX Strategy at TD Securities.

Sterling fell sharply in the week of 7-11 December as nerves grew that the two sides would be unable to reach agreement on level playing field rules and fisheries, but with the a 'no deal' remaining a messy prospect for both sides the incentive to make compromises remains significant.

"It seems there has been movement on both sides, therefore, as originally the EU wanted the autonomous right to react without reference to the UK," says Connelly. Now there has to be some sort of dialogue, according to RTÉ's source.

On governance, the principle of cross-sectoral retaliation appears to have been agreed, according to the RTÉ source. ie, either side could retaliate in another sphere if it felt there was a trade distorting divergence.

EU Chief Negotiator Michel Barnier said on Monday that a deal was still possible this week were the UK to row back demands on fisheries, which reminds us that the level playing field is not the only question up for consideration.

"With less than three-weeks left until the UK leaves the EU, brinksmanship is going to have to move aside in favour of compromise if a deal is going to pass before year-end. From a traders perspective, the prospect of a potential breakthrough does provide some floor for the pound for the time being," says Joshua Mahony, Senior Market Analyst at IG.

With regards to fisheries, EU Chief Negotiator Michel Barnier said there had been no real developments on fisheries and talks have been "very difficult".

According to Connelly, the latest stumbling block is a UK proposal on ownership of UK vessels. UK is proposing tighter restrictions on where fish are landed and the nationality of crews, ie the UK wants the right to regulate where fish caught in their waters would be landed.

Currently a lot of fish caught in UK waters are landed in Spain or France for processing, but the UK is proposing to repatriate that practice. The UK is also reportedly wanting tougher regulations on who crews the fishing boats.

Barnier said these discussions were "extremely difficult".

Spain and the Netherlands are said to be very unhappy about these latest measures, according to Connelly.

With regards to time running out within which to agree a post-Brexit trade deal, media are reporting that a number of EU states are toying the possibility of provisionally applying any deal in the event it is unable to be officially ratified before the end of the transition period on December 31.

In a briefing to representatives of the EU's 27 member states on Monday, Barnier is reported to have said a provisional application of the new treaty could be applied.

However, it is has long been reported that members of the EU Parliament would be unhappy with what is tantamount to an 'undemocratic' development.

But, Connelly reports that the European Council's legal service intervened this morning to say that the Lisbon Treaty makes it clear that the sole right of deciding whether or not to provisionally apply a treaty belongs to the Council (ie member states) at the moment of signature.

"All hell might break loose in the parliament, but you could legally do it," an EU source told Connelly.