"Curious" Merkel Gives Sterling a Free Pass into the Weekend

© European Council

The British Pound looks to close this week's account on a stable footing after Europe's most powerful leader gives nothing away in a joint press conference with Theresa MAy.

German Chancellor Angela Merkel says she wants as constructive a partnership as possible with the UK after it leaves the EU and they want to stick to the Brexit timetable.

The comments were made at a joint press conference with UK Prime Minister Theresa May following a meeting between the two leaders.  

With regards to the progress of ongoing Brexit negotiations, Merkel says she is “not frustrated at all” about the lack of detail on what Britain wants from Brexit, but she is “just curious”.

"We look forward to Britain setting out their ideas," Merkel told reporters.

Heading into the event we warned that there was the prospect of the Merkel-May press conference injecting a shot of volatility into the currency markets; however this was not to be as the German chancellor appears intent on letting chief EU negotiator Michel Barnier take the lead.

Markets will recall the sudden drop experienced by the currency in the wake of EU negotiator Michel Barnier's press conference just a week earlier and there was a weariness that any frustrations expressed by Merkel could inject another dose of volatility.

According to Roberto Mialich, an FX Strategist at UniCredit Bank, markets were waiting to see whether "the harsher tone heard so far from both sides on Brexit trading negotiations can give way to a somewhat softer tone."

The Pound looks set to close the week 1.7% higher against the US Dollar with the Pound-to-Dollar rate being quoted at 1.4044 at the time of writing. The Pound-to-Euro exchange rate looks set to end the week virtually unchanged at around the 1.13 market - which remains a long-term pivot for this pair.

All eyes now turn to a much-anticipated set-speech due to be delivered by Theresa May in Munich on Saturday where she is expected to deal with the issue of the future security relationship between the EU and UK. As one of Europe’s foremost military powers, with the continent’s largest defence budget, PM May has long sought to use the UK’s defence capabilities as a bargaining chip in the Brexit negotiations.

This week has seen some apparently positive Brexit headlines, on Thursday we heard the EU was to drop a 'punishment clause' from a draft negotiating document that sought to punish the UK for any transgressions committed during the Brexit transitional period.

Some analysts believe the text threatened to derail the negotiations saying the terms would prove a red line for London.  Further positive headlines were found in a FT report out Friday which suggests Britain will push for mutual recognition of financial services regulations after the UK leaves the EU.

This would allow for the prospect of UK financial services firms still being allowed a good deal of access to the European market which would be a huge step forward for the UK owing to the fact the country is a major exporter of financial services.

According to the FT, Chancellor of the Exchequer Philip Hammond will next week endorse the City’s call for a regime of mutual recognition for financial services with the EU after Brexit.

"This will likely be rejected by the EU as cherrypicking," warn UniCredit.

Europe's leaders have previously viewed financial services regulation as a single market issue and something separate to trade, saying there can be no “cherrypicking” parts of single market membership to keep or abandon.

London’s position has always been to seek a unique arrangement with Europe, which caters specifically to the balance of trade between the UK and the EU as this would represent a fair deal where both sides benefit.

As it stands, Britain imports significantly more goods from Europe than it exports, while the same situation exists in reverse on the services front. Hence it suits the Europeans to gain tariff free access to the UK market while refusing a similar reciprocal offer.

A majority of Britain’s services exports to Europe are financial and legal services, although these are not traditionally covered by trade agreements.

There is an argument to be made from London’s side that, given the UK’s large trade in goods deficit with Europe, any deal that only covers physical goods is of limited value to Britain.

Continued tariff free access to the UK market is likely a necessity for Brussels given that British companies and consumers are already grappling with the inflationary impact of a devalued Pound Sterling.

Any failure to an agreement on post-Brexit trade could mean tariffs are applied to both British and European goods.

While it is possible for a devalued currency to offset the impact tariffs on British exports, the combined effect of a weaker Pound and new import tariffs could limit UK demand for European goods.

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