Pound Wakes from 'Slumber' on Bid by EU Parliament for Flexible, 'Privileged' Brexit Deal

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* EUR/GBP exchange rate awoken from "slumber" says analayst

* Report says Britain should be allowed "privileged" single market access and membership of EU agencies

* David Davis tells an audience in Vienna that UK will not tear up existing rules and standards when leaving EU

European Union's parliament calls for EU negotiators to show flexibility in trade talks helping Pound Sterling higher as markets bet this will lead to a decent and timely Brexit deal.

The Pound-to-Euro exchange rate trades at 1.1347 mid-week having been over half a percent lower 24 hours prior, the recovery from February 20's day low at 1.1273 is thanks in part to reports revealing the European Parliament is set to call for flexibility in Brexit trade talks.

The European Parliament is said to be preparing a "detailed," 60-paragraph resolution which will call for more flexibility in future relationship talks with Britain that would allow for privileged single-market access.

This could be a gamechanger in that if true, it represents a notable softening in Europe's stance.

"We think the EU has every reason to be generous and to put economic interests ahead of political interests – where quite frankly it doesn’t need to worry," says Jordan Rochester at Nomura Plc in London.

Nomura think the trade talks, when we get onto them, will be tough, difficult and may have moments that cause markets to be concerned. "But the UK has, by chance, found itself operating against the best possible backdrop to give it a chance of a decent deal".

Sterling's move against the Euro was the most sizeable, but we note gains were broad-based with the Pound-to-Dollar exchange rate recovering back above 1.40 once more, but the US Dollar recovery appears to be a dominant theme in global markets at present and all currencies are finding it hard to resist the comeback.

Following the report concerning the EU parliament, the Pound was seen to be the best-performing major currency on the day.

"The Pound has had an exciting start to the week, and is now rallying against the Euro following an early sell-off this morning," says Hamish Muress, currency analyst at OFX. "Today’s report goes to show how when Brexit news comes back to the fore, it can be the key driver that dominates market sentiment."

Commenting on the developments, analyst Viraj Patel at ING says "that's what you call a GBP specific move, one that helps lift the Pound (EURGBP drops to 0.8820/30 and GBPUSD knocking on 1.40 door). The Pound's on a Brexit hype."

Reports suggest the EU Parliament wants the EU to negotiate an 'association agreement' which could give Britain "privileged" single market access and membership of EU agencies.

The development marks a significant break from the hardline adopted by the chief European Union Brexit negotiator Michel Barnier who has thus far shown a clear determination to deliver on the mandate handed down to him.

The question is - how does the EU Parliament's resolution impact on the official mandate, does it allow a softer tone to be adopted by Barnier?

If the answer were yes, then certainly this is a positive development from Sterling's perspecive.

Here's the Prisoner's Dilemma framework we've been using in 2018 to rationalise moves like today. Much of 2017 was about $GBP trading with an uncertainty premium. But signs of more flexibility in trade talks, greater clarity will help sterling move to more neutral #Brexit levels pic.twitter.com/YQtZOE1VNE

— Viraj Patel (@VPatelFX) February 20, 2018

"The big move of the morning was in the normally somnolent EURGBP pair, which slumped as reports hit that the EU parliament was preparing it’s own plan for the UK-EU relationship, which would see the UK given special associate status. This kind of bespoke deal is exactly what the pair need, an acknowledgement of their shared history and mutual dependency, and the fact it comes from arch-federalist Verhofstadt gives it extra weight. Is sanity about to prevail?" says Chris Beauchamp, an analyst with IG.

We would argue that this development represents the culmination of frustrations of a number of EU member states that feel the official hard-line approach being pursued goes not necessarily represent their interests suggesting the united front maintained by the EU to date might not be as solid as once assumed.

Markets are betting that these developments point to a transitional deal being wrapped up soon and the two sides agreeing on a tight trading relationship.

The news comes as the UK's Secretary for Exiting the European Union - David Davis - addresses an audience in Vienna delivering the Government's latest installment in a two-week long series of speeches to set out its position for the next phases of Brexit talks.

Some fear Britain will be plunged into a Mad Max style world borrowed from dystopian fiction...these fears about a race to the bottom are based on nothing, not our history, not our intentions, nor our national interest.

— Exiting the EU Dept (@DExEUgov) February 20, 2018

Davis stressed to the audience that the UK would not be looking to diverge massively from existing European Union standards - standards Davis is keen to stress the UK helped create.

The idea is to create a basis for the UK and EU to agree a trade deal that is as frictionless as possible precisely because the two economies are so closely aligned.

"We start from a position of total alignment, with unprecedented experience working with one another’s regulators and institutions," says Davis. "The principle of fairness, and fair competition, which is essential to any trade agreement between any two states, will be particularly important here."

The Brexit Secretary adds that neither side should put up unnecessary barriers during this process. "We are seeking a new framework that allows for a close economic partnership — that recognises the fact we are leaving the EU. The principle of fairness, and fair competition, which is essential to any trade agreement between any two states, will be particularly important here."

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