“Sufficient Progress” Possible but a "Huge Challenge" Says Tusk After Euro Sweeps the Board Vs Pound and Dollar

1. Euro dominates foreign exchange markets ahead of the weekend
2. Theresa May meeting with Donald Tusk, outcome and weekend commentary to set tone for Monday's open
3. Some progress has been made but issues remain, according to both PM May and Donald Tusk - the clock is ticking still! 

“Sufficient progress” in Brexit negotiations is still possible before a key mid-December European Council summit, according to council President Donald Tusk, but will be a “huge challenge”.

The European Council chief made the comments on Twitter after holding a meeting with Prime Minister Theresa May at a council summit Friday.

PM May was widely reported to have gone to Brussels armed with a financial offer worth £40 billion to the EU in the hope of being able to move talks along to the subjects of trade and transition after December’s European Council summit.

However, money and a solution to the Irish border question remained key sticking points following the Friday talks, leading to another warning from Brussels.

Sufficient progress in #Brexit talks at December #EUCO is possible. But still a huge challenge.
We need to see progress from UK within 10 days on all issues, including on Ireland. pic.twitter.com/NKe86zGo17

— Donald Tusk (@eucopresident) November 24, 2017

Pushing talks on from the so-called ”divorce bill” to transitional and trade arrangements is key to the UK because, without an early agreement, the government fears international financial services firms will move some of their operations to the continent - damaging the UK economy.

Brussels faces a budgetary black hole the size of Western Europe after the UK departs the union while, given the processes around EU financial planning, any move to depart during the current budget period running to the end of 2021 could cause more mayhem.

An absence of progress on the two points Friday, and the prospect of further details of difference making their way to press over the weekend, could mean there’s a glum mood among Sterling currency pairs when markets open for the new week.

Euro Sweeps the Board Vs Pound, Dollar and the G10's

The Euro pushed aside all other currencies as the week drew to a close, with investors citing the Eurozone's impressive economic expansion as reason to back the currency.

A surge in the Euro-Dollar exchange rate above 1.19 opened the flood-gates for other Euro cross rates to push higher, the Euro-to-Pound included.

The Euro-Dollar jumped an impressive three-quarters of a cent to 1.1935 at the time of writing, sucking the Euro-to-Pound to 0.8946 which is the highest level in a week. This gives a Pound-to-Euro exchange rate of 1.1175.

The euro was supported by a very strong German Ifo business confidence reading on Friday, November 24 which confirmed the rate of expansion in Europe's largest economy continues apace.

This was just a latest in a strong run of data which is likely to ensure the single-currency's trend of appreciation.

"This year’s broad-based euro appreciation has been driven by improving eurozone fundamentals and the market starting to price in the ECB’S upcoming policy normalization," says Kathrin Goretzki, a FX Strategist with UniCredit Bank in London.

Pound Buyers Await Confirmation of Brexit Progress

Progress on Brexit negotiations are central to where Sterling goes next, and markets await a crucial update on the matter on Friday.

Theresa May is in Brussels for a meeting of the European Council and eastern European states, telling reporters on arrival that she is keen to press the EU into moving talks on to issues of trade and the future relationship.

An anticipated meeting between Prime Minister Theresa May and European Council president Donald Tusk later on Friday is expected and forms the key risk for the Pound heading into the weekend.

“PM May’s trip to Brussels today to meet with EU officials may keep the GBP/USD range bound ahead of the resultant headlines,” says Emmanuel NG, a strategist at OCBC Bank.

But ahead of the meeting news has broken that the UK is willing to look at Northern Ireland staying within the European customs union; a huge concession on behalf of the UK in terms of trying to push negotiations forward.

Details are still sketchy at the time of writing but moving the Northern Irish question forward would almost certainly help push talks forward.

But, Arlene Foster, head of the DUP and a key ally of Theresa May, has warned she could not accept any position after Brexit that would give the perception that Northern Ireland is in any way different from the rest of the United Kingdom.

Number 10 would surely not have suggested Northern Ireland stays within the customs union in some way, shape or form if they did not have DUP backing on the matter. Creating a solution that suits, Ireland, the Northern Ireland leadership and the UK will certainly require some creativity and goodwill.

And Sterling needs this if it is to rise; markets are looking for signs of the “sufficient progress” necessary in order for the European Council to vote to approve the Brexit negotiations moving on to the subjects of trade and transition after the December summit.

“Sufficient progress” is substantially a byword for money, Brussels is facing a black hole in its books after the UK’s exit from the EU in March 2019 and so negotiators have put forward the concept of a divorce bill in order to ensure the UK continues to fund the EU budget once they have left the Union.

????️ @number10gov Theresa May spoke to media ahead of the #EaPSummit in Brussels today. | Doorstep video ⬇️https://t.co/oBV2TY2DeB

— UKREP ???????????????? (@ukineu) November 24, 2017

"There are signs of progress, but it remains unsure whether the EU Summit mid-December will be able to give a green light for the next step in the negotiations. For markets/Sterling, the outcome of this process is a binary risk. So one can expect more erratic trading as long as uncertainty persists. A further rise of the Euro might also slightly support EUR/GBP," says Piet Lammens, an analyst with KBC Markets in Brussles.

Brussels wants payment for investment and development projects agreed at the European level during the UK’s membership but that have not yet begun to be implemented.

“If Brexit negotiations are to move on to talking about trade, the UK needs to make progress on the divorce settlement and the Irish border,” says Kit Juckes, chief foreign exchange strategist at Societe Generale.

PM May had offered to continue the UK’s budget contributions up until the end of 2021, something likely to cost in the region of £18 billion. But she has also been widely reported to have secured cabinet backing to offer as much as £40 billion worth of payments to move talks along.

The new financial offer is what PM May is likely to present formally to Donald Tusk Friday. Pushing talks onto the subjects of trade and transition by the end of the year is seen as crucial if a deal is to be struck in time for it to be ratified in all parliaments across the EU before March 2019.

“A financial offer seems likely and one solution to the border impasse would be to offer the Irish government a veto over any final agreement, which would buy time to find a practical solution,” says Juckes.

Yet, news that the Irish Government is close to collapse on Friday, November 24 throws further interesting questions into the mix - how can a Government that has lost authority possibly veto progress towards starting trade negotiations with its most important trading partner?

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Body Language

Above: Michel Barnier, Donald Tusk (C) European Commission.

Whether the Pound rises or falls into the close of the week will depend a lot on whether the PM and her Brussels counterparts decide to choreograph some kind of tussle over the higher payment.

If the offer is simply put forward by May and warmly received by Tusk then it might be taken as a positive however if, for the benefit of the audiences back home, the pair make any attempt at theatrics then Sterling could see a rough end to the week.

"Perhaps only when real money positioning makes a move can we expect a sustained rally, something along the lines of transitional deal progress could be just that," says a note from Nomura to clients, issued on November 24.

But, we should expect the Brexit negotiation saga to extend into 2018 and a sizeable recovery in Sterling therefore remains some way off.

“While Brexit risks themselves are most likely a focus for 2019 or later, the combination of some key soft deadlines and an unstable, minority government leave the potential for bouts of political uncertainty throughout 2018, especially in the first half of the year,” says Jacqui Douglas, chief European macro strategist at TD Securities.

Douglas’ comment gets right to the heart of an understated issue for Sterling. Markets and commentators have urged the PM to cede to Brussels demands in order to move talks along, seemingly under the assumption that this is all that is required for an orderly breakup between the UK and the EU.

But this ignores the possibility that there is nothing to prevent such a “deadlock”, or ransom period, from recurring during the year ahead. Neither would a December agreement remove political risk from the table in the UK for the year ahead.

“We do see about a 20% chance that an agreement on a transition arrangement, which would push the effective date of Brexit into the next decade, is delayed past Q1 and increases market uncertainty,” says Douglas. “We also see at least a one-in-three chance that, regardless of how Brexit negotiations go, the current government falls and new elections are called.”

The Pound-to-Dollar rate was quoted 0.13% higher at 1.3322 during early trading Friday while the Pound-to-Euro rate was marked 0.11% higher at 1.1238.

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