Huge Rift Between EU and UK on Fisheries Blocking Brexit Deal, Exposes Pound Sterling to Volatile Friday Session against Euro and Dollar

- Pound eases back ahead of crucial moment for Brexit
- Barnier says just hours remain
- Huge gulf exists on fisheries

Above: London, United Kingdom. Prime Minister Boris Johnson speaks with President of the European Commission, Ursula von der Leyen about Brexit in his office, 10 Downing Street. Picture by Pippa Fowles / No 10 Downing Street.

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The British Pound faces a potentially volatile finish to the week as the EU Parliament has set a Sunday deadline for talks if a deal is to be ratified before year-end and amidst signs the two sides face substantial disagreement on the matter of fisheries.

On Friday EU Chief Negotiator Michel Barnier said the UK would be required to accept limits on access to the EU single market in return for greater control over fishing, or face no deal.

Briefing the EU Parliament Barnier said there were just hours remaining within which to achieve a deal.

"If the UK wants to cut access to these waters for European fishermen, at any given time, then the EU also has to maintain its sovereign right to react or to compensate by adjusting the conditions for products, and notably fisheries products, to the single market," said Barnier.

The developments come after a call between UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen on Thursday evening showed fishing to be the final issue to be resolved between the two sides.

In a statement following the call the office of the Prime Minister said negotiations "were now in a serious situation. Time was very short and it now looked very likely that agreement would not be reached unless the EU position changed substantially."

The statement says Johnson underlined to his EU counterpart "that the negotiations were now in a serious situation".

"Time was very short and it now looked very likely that agreement would not be reached unless the EU position changed substantially," it added.

Johnson said that we were making every effort to accommodate reasonable EU requests on the level playing field, but even though the gap had narrowed some fundamental areas remained difficult.

It is on the matter of fisheries however that the UK appears to be particularly unhappy.

Johnson told von der Leyen the UK could not accept a situation where it was the only sovereign country in the world not to be able to control access to its own waters for an extended period and to be faced with fisheries quotas which hugely disadvantaged its own industry.

"The EU’s position in this area was simply not reasonable and if there was to be an agreement it needed to shift significantly," added the statement.

Above: GBP/EUR chart at 15 minute intervals

By contrast, a statement from the EU Commission said:

"We welcomed substantial progress on many issues. Yet big differences remain to be bridged, in particular on fisheries. Bridging them will be very challenging."

The two sides are clearly far apart and the prospect of a deal ahead of the weekend looks unlikely.

"While differences remain, fisheries now appears to be the last remaining stumbling block to a deal, which suggests the two sides have largely reached agreement on the big fundamental issue of the “level playing field”, as well as governance of any agreement. We continue to expect a deal to be agreed in the coming days, largely because fisheries is a tiny share of the economy and a compromise on fishing quotas seems likely," says Chiara Silvestre, Economist at UniCredit Bank.

Ahead of the call between the two leaders optimism had been running high, with sentiment allowing the Pound-to-Euro exchange rate poke back above 1.11 and the Pound-to-Dollar exchange rate to hit new two-year highs at 1.3622.

Sterling has pared those gains on Friday, with GBP/EUR now at 1.1054 and GBP/USD now at 1.3545.

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Numerous off-the-record briefings made through the course of the past 24 hours reveal that various pieces in an intricate puzzle are falling into place, but that ultimately contentious issues remain to be resolved.

The EU's Chief Negotiator Michel Barnier briefed on Thursday that a deal could be done by today, although his conviction was not high.

It would be "difficult but possible," Barnier told AFP.

Earlier in the day Barnier said talks had made good progress, but warned that "stumbling blocks remain."

The Pound rallied on the positive developments, with the Pound-to-Euro exchange rate reaching an intra-day high at 1.1130, before paring gains back below 1.11. The Pound-to-Dollar exchange rate recorded a fresh two-year high at 1.3622 before paring gains to 1.36.

Despite the gains in GBP/USD, the GBP/EUR remains the benchmark from which to judge the market's assessment of Brexit talks and that the pair remains unwilling to make significant moves either higher or lower betrays a market paralysed by uncertainty.

Prime Minister Boris Johnson's office meanwhile reaffirms Johnson's view that a 'no deal' is still the most likely outcome to talks, a view later parroted by Johnson's most senior minister Michael Gove in front of a Parliamentary committee.

But the waiting game won't last forever as the European Union's Parliament has said if a deal is not presented to MEPs by Sunday they will be unable to ratify it into law by year-end, when the transition period expires.

This means that Sunday really could be the deadline for talks - unlike the artifical deadline that was the previous Sunday - which could well prompt negotiators to strike a deal at the weekend.

This in turn means Monday could witness a highly volatile open that could see Pound exchange rates 'gap' either lower or higher.

"Brexit holds the near term keys to Sterling with a further relief rally likely if a deal is reached. A shock no-deal outcome, which hasn’t been ruled out, could send the pound into a precipitous nosedive," says Joe Manimbo, a foreign exchange analyst with Western Union.

In the short-term, the Pound is liable to heightened volatility ahead of the Friday close as markets either react to a breakthrough in negotiations or square positions ahead of a potentially volatile Monday start.

"If we see a deal emerge, a relief rally is certain. In the opposite case, more weakness is likely, as markets have not fully priced in the turbulent no-deal scenario," says David Alexander Meier, an Economist at Swiss bank Julius Baer.

Julius Baer hold a short-term forecast for the Pound-to-Euro exchange rate at 1.1364 under their optimistic scenario that a deal is agreed.

"Given the behaviour of the leaders, a last minute prolongation of the status quo probably cannot be fully ruled out. The holiday season could well turn out to be less jolly for struggling negotiators and a nail-biting economy," says Meier.