Pound Sterling Holds Advantage as Barnier & Raab Confirm Progress

- British Pound holds gains as latest Brexit press conference signals progress

- Raab holding onto striking deal by October EU summit

- Analysts maintain cautious view on Sterling's outlook

© European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus

Pound Sterling shrugged at the latest comments from UK and European Union Brexit negotiators ahead of the weekend, although some analysts are warning that the talks are still likely to go down to the wire and more losses are ahead for Sterling.

UK Brexit Secretary Dominic Raab and the EU's Michel Barnier held a joint press conference following this week's negotiations. 

The message was one of gradual progress, but familiar sticking points remain. 

Ultimately though the two sides appear committed to achieving a deal which was good enough for markets to maintain Sterling's recent advances.

Negotiations dwelt on technicalities and issues that are unlikely to move the market, these included the Galileo navigation system and issues of joint security.

On the broader issue of getting the talks across the line - something which interests currency markets - Raab says "we remain committed" to achieving a deal before the October European Council summit.

"On my part I am optimistic that a deal is within reach, if both sides grasp the opportunity," the UK's Brexit secretary added.

Progress today in negotiations with ⁦@MichelBarnier⁩. We are building positive momentum. I am stubbornly optimistic we can secure a good deal, and look forward to continuing our work next week. pic.twitter.com/SsLMAWfLcM

— Dominic Raab (@DominicRaab) August 31, 2018

Barnier did however emphasise that no deal would be possible unless a backstop on the Irish border issue was achieved.

We see this as a difficult red line for the UK to negotiate as we know the current administration would not allow Northern Ireland to diverge from the rest of the UK.

Regardless, currency markets saw no reason to reverse previous gains.

The Pound-Dollar exchange rate went lower to 1.2961, but still retains a 1.0% advance for the week. Broad-based Dollar strength in risk-off markets were largely behind the move lower in this particular exchange rate.

The Pound-to-Euro exchange rate was relatively unmoved when it traded marginally higher to achieve 1.1156; the pair maintains a 0.90% advance for the week.

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Near-term Momentum Likelt to Remain Intact

Friday's statements allow the British Pound to hold onto recent gains.

The Pound rallied mid-week on in the wake of comments from EU negotiator Michel Barnier, who said on Wednesday that he is prepared to offer a "a partnership with Britain such has never been with any third country."

French President Emmanuel Macron aided sentiment further on Thursday on reports he will push fellow EU leaders harder for a deal at a summit in Austria due September.

The Times claimed Macron is "is preparing to throw Theresa May a lifeline by pushing other EU leaders to agree a close relationship with Britain after Brexit as part of his vision for a united Europe." 

Concerning the outlook for the Pound, near-term gains are still possible.

"Our view remains that a Withdrawal Deal agreement by year-end is more likely than not and more encouraging Brexit headlines could see leveraged funds further bail on their recently built short GBP positions. A further neutralisation of GBP positioning would see GBP/USD moving back to the 1.31-1.32 area," says Viraj Patel, an FX strategist at ING Group.

ING's Patel says that a further liquidation of bearish bets against Sterling could drive the Pound-to-Euro rate as high as 1.1360.

But some economists are unconvinced that a deal on the UK's withdrawal is any closer than it was previously and are warning that more losses are ahead for the British currency. 

"Michel Barnier’s suggestion that the EU is ready to offer the UK a bespoke Brexit deal has provided some reassurance that the UK is not heading for a disruptive “no deal” exit from the EU in March 2019. However, we are sceptical that this marks a major turning point in the negotiations and we still think that an agreement will probably only be secured at the eleventh hour," says Ruth Gregory, a senior UK economist at Capital Economics. 

Hard Talks Ahead, and this Could Keep Sterling Under Pressure Medium-Term

Most currency strategists agree any strength in Sterling is likely to be a short-term phenomenon and medium-term weakness is likely to persist as Brexit talks are likely to remain contentious.

Amongst the more difficult issues stalling progress in the negotiations remains the Northern Irish border.

Brussels has always insisted there can be no "hard border" for the sake of peace in Northern Ireland but that there would have to be one if the UK leaves its single market and customs union because, in a post-Brexit world, the UK would operate different trade tariff regimes with different countries to the EU.

This was the impetus for PM May's "Chequers Deal" proposal for the future relationship that means effective single market and customs union membership for all of the UK's goods trade, alongside a "mobility of labour" agreement that has been criticised as code for the continued free movement of labour.

The so-called "backstop" proposals for trade arrangements should UK and EU officials fail to agree a solution to the Irish border problem would ultimately see all of the UK remain inside the single market and customs union until a deal that is palatable to Brussels can be struck.

Short of a deal, this would be the only option available to the PM unless she were willing to allow the Northern Irish province to be annexed from the rest of the UK and absorbed into the EU's legislative and regulatory orbit after Brexit.

"Even if a deal is struck between the UK and the EU soon, there is no guarantee that it will be accepted by UK MPs. It might not be vague enough to appease the warring factions in the Conservative Party. And Labour MPs could vote against it in the hope that the ensuing chaos prompts an election," says Gregory. 

Despite already having abandoned almost all of her red lines, many expect Prime Minister Theresa May will have to make further concessions to the EU before Brussels becomes willing to declare itself satisfied with the withdrawal negotiations.

Such concessions would merely add to existing domestic political pressures, given the spate of government resignations sparked by the PM's "Chequers Plan", and could give rise to a period of renewed weakness for Sterling.

"Overall, while we are still optimistic that a Brexit deal will be agreed, we think that it will probably be secured at the eleventh hour," says Gregory. "This is the key reason why we think that the Monetary Policy Committee won’t move again until May 2019. This assumption also underpins our view that sterling will end the year a little lower, at $1.25 and €1.09."

If the "withdrawal agreement" is not ratified in all parliaments across the EU before March 29, 2019 then the UK will leave the EU without any formal exit or trade arrangements at all, and default to trading with the bloc on World Trade Organization terms.

This is how the nation currently does business with the US, which is the UK's largest single export market, as well as China and most other emerging world economies. However, most generally agree that if this happens there will be at least some negative impact on economic growth in the short term. Many, including the Bank of England, even say there will be longer term impact too.

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