British Pound Shows Nerves as Political Heat Raised in Brussels Jawbone Offensive

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Above: Michel Barnier and Donald Tusk. (C) European Council

The past 24 hours has seen an apparently coordinated surge in soundbites from Brussels regarding the European Union's position on Brexit and we are wary volatility in Sterling might soon increase as a result.

A number of senior figures in Brussels have added flavour to the Brexit debate over the course of the past 24 hours which could put Brexit negotiations back on the radar for Pound Sterling.

Of note, has been an apparently coordinated message from Brussels that they would welcome a second referendum in the UK on EU membership.

"Unless there is a change of heart among our British friends, Brexit will become a reality – with all its negative consequences - March next year. We, here on the continent, haven’t had a change of heart. Our hearts are still open for you," says President of the European Council, Donald Tusk.

Echoing the message is European Commission President Jean-Claude Juncker in an address to the European Parliament:

"Our door still remains open. I hope that that will be heard clearly in London."

Tusk and Juncker's comments inject fresh impetus in the debate on the prospect of a second referendum on EU membership; something that has been vociferously promoted by leading Remain figures such as Labour's Chuka Umunna and the Conservative's Anna Soubry.

Incidentally, both are part of a group of UK politicians that have been in Brussels over the past 24 hours to meet key members of the establishment, including chief EU Brexit negotiator Michel Barnier.

Pleased to meet M Barnier today with @EURelationsAPPG pic.twitter.com/9YKGsjd8T7

— Anna Soubry MP (@Anna_Soubry) January 15, 2018

The Times reports that the group pushed Barnier for a positive EU response if the Commons rejected a final Brexit agreement before Britain’s withdrawal in March next year.

“If you held a vote a majority of MPs would back Remain,” Soubry said before the talks.

Whether there is some coordination between the visit of leading Remain lights and Tusk's comments is of course speculative, but what we are certain of is that were the idea of a second EU referendum gain impetus, the Pound would rally.

In fact, analysts at Société Générale are so wary of such a move that they suggest clients hedge against unexpected Sterling strength in 2018.

Also chiming in is Manfred Weber, head of the EPP Group in the European Parliament and a close ally of German Chancellor Angela Merkel.

"It is good that we also start talking about the time after March 2019. But I have to express a clear warning: don’t take the conclusion of a “transitional period” for granted. If the conditions are not good,the EPP Group will not give its consent," says Weber.

Leader of the largest bloc of MEP's in the European Parliament, Guy Verhofstadt has meanwhile reflected that it appears to him that the UK government is confused over which of their policies are actually from the EU and he is very pleased that latest guidelines for negotiation of transition period specify there's no cherry-picking for the UK and that freedom of movement of people should continue.

The news confirms that the European Union are going to play hardball with the UK and dissipates any of the feel-good factor that arose from reports out on Friday, January 12 that finance ministers in Holland and Spain were keen on pursuing as soft a Brexit as possible.

2018 will be fraught with difficulty for UK Brexit negotiators, and of course, the British Pound.

"Perhaps its me but I get the distinct impression that M Barnier has absolutely no intention of negotiating a workable agreement with UK over Brexit. President Macron is alo looking very smug as he dangles an immigatrion scrap in front of us knowing we won't accept," says David Buik, a City veteran who was most recently with brokers Panmure Gordon.

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