British Pound Firms v Dollar, Euro as Boris Johnson Signals Brexit Bill Concession

The foreign secretary's comments over the "Brexit Bill" supports an emerging narrative suggesting the Pound may already have seen its darkest days as the UK Government gets serious about negotiating with the Europeans.

An apparent U.K. government climb-down over payments to Brussels as part of the Brexit process, on Friday, added to the case recently made by analysts that the worst may now be behind the pound to euro exchange rate.

Sterling received a small boost during early noon trading after foreign secretary Boris Johnson, in an interview with the BBC Radio 4 Today program, acknowledged that the U.K will be liable to pay a bill to the EU as part of the Brexit process.

"Some of the sums that I’ve seen seem very high and, of course we will meet our obligations, we are law-abiding, bill-paying people," he said, before noting that the U.K. has already paid the EU hundreds of billions of pounds throughout the course of its membership.

Johnson’s comments were less incendiary than his earlier statements, where he was recorded in parliament saying that Brussels could “go whistle” for the amounts of money that he’d heard being thrown around, but the underlying message altogether similar.

“I’m not saying that I accept Barnier’s interpretation of what our obligations are. But I’m certainly saying that we have to meet our legal obligations as we understand them,” he explained.

The so-called Brexit bill has taken centre stage in the early stages of the Brexit negotiations and is key to the Sterling-Brexit debate in that it forms one of the issues Europe want to nail down before talking trade.

Unsourced reports from various media outlets have put the number Brussels is asking for as high as Eur 100 billion, while U.K.-based lawyers originally said their is no legal basis on which Brussels can demand any payments beyond regular budget contributions up to the date of exit.

Brussels has insisted that without progress toward agreeing a Brexit bill, talks over future trade relations cannot begin, while the consensus view among analysts and pundits is that a “no deal” Brexit will mean devastation for the U.K. economy and Pound Sterling.

"The bottom line remains that as long as the UK government remains unconvincing in terms of being a credible negotiating partner against the backdrop of a BoE position that is interpreted as accepting of slow-but-steady GBP weakness, FX markets will retain a strong bias towards holding short GBP positions," says Shahab Jalinoos, an analyst with Credit Suisse.

The important point to note is that the EU are not necessarily asking for the issue to be set in stone, but they want to see progress. A middle ground is in fact likely to be easier to achieve than a pessimistic market might be pricing into Sterling.

Many analysts believe that the UK and Europe will ultimately align, and if they do Sterling could suddenly be exposed as being oversold and ripe for recovery.

“GBP could remain under pressure ahead of key domestic and Brexit political risk events in October,” says Viraj Patel, a strategist at ING Groep NV, adding; “But we view this as an overshoot of more fundamentally-justified levels, rather than a sustained trend in EUR/GBP towards parity.”

Patel has also described the Pound as being “materially undervalued” and predicted that this should limit further weakness for the currency.

At the time of writing GBP/EUR is at 1.0866 and GBP/USD is at 1.2828.

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