Pound Sterling Gains against Euro and Dollar as EU and UK on Brink of Confirming Brexit Deal

Above: 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.

• Market rates: GBP/EUR: 1.1137 | GBP/USD: 1.3584
• Bank transfer rates: 1.0925 | 1.3304
• Specialist transfer rates: 1.1060 | 1.3489
• More about bank-beating exchange rates, here

The British Pound extended gains on signs that a post-Brexit trade deal had been agreed, but a final confirmation from UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen was still elusive on Christmas Eve morning.

The Pound-to-Euro exchange rate rose to 1.1150 on Thursday morning, the Pound-to-Dollar exchange rate went to 1.36. Sterling was 0.75% higher against both the Australian and New Zealand Dollars and recorded gains against all the world's largest currencies.

"By removing a major downside risk to the UK economy both in the near-term and long-term, a deal would unlock significant investment in UK and support the recovery once the ongoing coronavirus shock starts to fade as well as provide a positive backdrop for UK equities and Sterling heading into 2021," says Kallum Pickering, an economist with Berenberg Bank.

Numerous media sources reported that a deal had been largely agreed, but delays in making a final announcement were likely as leaders pored over the 'dirty' text.

This would inevitably open the door to some last minute wrangling, which is what Ireland's foreign minister Simon Coveney confirmed to reporters.

The Telegraph is reporting that last minute negotiations over individual fish species has held up a final agreement.

A press conference by von der Leyen and Johnson was due at 8AM GMT, but it has since been pushed back to 10:00 AM, and this can of course not be guaranteed.

Johnson and von der Leyen have been in regular talks on the phone over the past 48 hours in an effort to break the deadlock, but the Daily Mail reports an 11th-hour intervention by German chancellor Angela Merkel avoided 'no deal'.

The rally in Sterling reflects a market that is now starting to fully price in a deal and further gains could be forthcoming over coming hours.

"If a deal does transpire on 24th December, GBP is likely to make further gains," says Tim Riddell, Macro Strategist with Westpac. "GBP/USD is likely to push into a 1.37-1.40 range but potential for a more substantial move towards 1.4500 now seems unlikely given how positions exhaustion is so prevalent."

The Pound-Euro exchange rate is forecast to move towards 1.1364, but Riddell does see "scope for a shift" to 1.1765.

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Riddell does however caution that Brexit will never quite be over, indeed the relationship between the two sides will require further talks and negotiations over coming months and years.

"The concept that a deal being struck would put an end to EU/UK negotiations is erroneous. Talks will be a constant, not only due to the need to gain agreement on Financial and other services, but also to ensure that regulatory and legal divergences and changes from either UK or EU will be addressed and agreed upon to maintain the trade deal," adds Riddell.

The outlook for the Pound remains challenging, according to new analysis from Rabobank.

"The likelihood that larger swathes of the UK will be entering higher ‘tier 4’ restriction to prevent the transmission of the virus will significant dampen recovery prospects," says Jane Foley, Senior FX Strategist at Rabobank. "Latest developments drives home the reality that economic news will worsen before it improves and that the country is facing a tough start to the New Year."

Assuming a deal is struck, Rabobank forecast the Pound-to-Euro exchange rate will struggle to rise beyond 1.1236/1.1363.

Under a 'no deal' scenario, Rabobank forecast GBP/EUR will fall to 1.0752/1.0526, "dependent on whether the door is left open for talks on some sectors next year."

"Rising covid-19 cases, government wrangling, a widening of tier 4 restrictions in England, increased pressure on the public purse and, in all likelihood a continuation of negotiations with the EU on areas such as financial services and security suggest the GBP may be unable to shrug off its vulnerability or volatility in 2021," adds Foley.

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Berenberg's Pickering says Exiting the EU Single Market and Customs Union will lower UK potential growth by harming its export prospects and reducing inflows of foreign direct investment and qualified labour from the EU.

A deal can limit some of the damage, says Pickering. Relative to potential growth of ~2.0% as an EU member and less than 1.5% in case of a hard exit, Berenberg estimate that UK potential growth will be around ~1.7% in the years ahead.

"Near-term, some disruptions at the UK-EU border are inevitable in January as traders will be subject to additional paperwork and checks once the UK has left the EU Single Market and Customs Union. However, such disruption will be much less than in a no-deal scenario," says Pickering.