British Pound at Multi-Week Best on Latest 'Barnier Bump': Brexit Withdrawal Agreement Likely by November

Above, right: Michel Barnier. Image © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus

- Markets increasingly convinced chances of 'no deal' Brexit are fading

- 2.75% appreciation in GBP in recent weeks thanks to recent Barnier interjections

- Reduced risk premia in Pound Sterling could allow for more gains

The British Pound was seen gaining on the Euro, U.S. Dollar and other major currencies following comments by chief EU Brexit negotiator Michel Barnier that a Brexit deal was likely to be achieved in 6-8 weeks.

The comments raise the prospect of the Withdrawal Agreement being signed by November.

There were concerns that a deal being reached before Brexit day in March 2019 was becoming increasingly allusive owing to entrenched differences on both sides of the negotiating table; the anxiety over such a 'cliff edge' Brexit materialising had weighed heavily on Sterling through much of the April-August period and delivered multi-month lows against both the Euro and Dollar.

"Any progress that suggests an earlier agreement presents upside for the Pound," say foreign exchange strategists at Barclays.

At a conference in Bled, Slovenia, Barnier said an agreement needs to be reached by the start of November, but several outstanding issues still require attention.

The Pound-to-Euro exchange rate was nevertheless seen rallying to a multi-week best at 1.1240 in the wake of the comments while the Pound-to-Dollar exchange rate hit a multi-week best at 1.3051.

This is the third major Pound-friendly steer on Brexit made by Barnier in the past ten days.

"Based on my calculations Michel Barnier headlines have accounted for a cumulative +2.75% appreciation in GBP in recent weeks. That's right, the Pound is currently being supported by a French politician," says Viraj Patel, analyst with ING Bank N.V.

Sterling appreciated into the weekend following comment from Barnier that Withdrawal Agreement talks were 90% done leaving traders to price out the prospect of the Pound-unfriendly cliff-edge Brexit taking place and exit their bets against the currency.

"Sterling firmed as it built on last week’s gain that came from reduced uncertainty related to Brexit. While Brexit remains a source of uncertainty for the Pound, optimism is cautiously on the rise that Britain and the EU might ultimately find enough middle ground to agree on a trade deal in time to avert a potentially disorderly divorce," says Joe Manimbo, an analyst with Western Union.

Short $GBP specs: "Fool me once, shame on you. Fool me twice, shame on me"
It's becoming increasingly difficult to shake off the positive #Brexit noise. Short covering could take #GBPUSD to 1.32. Need another catalyst to clear 1.3040/60 & concrete progress (Irish border) for 1.36 https://t.co/sImpjhVKy0

— Viraj Patel (@VPatelFX) September 10, 2018

"If one person can shift Sterling at the moment it is Michel Barnier. The currency is desperate for any signs of good news from the EU’s chief negotiator, often making the most of some pretty tepid statements. Monday’s gains seem slightly more justified however, with Barnier saying that it was a ‘realistic’ possibility a deal could be reached by November. And though, of course, the content of any deal is the thing that really matters, at the moment the Pound will take what it can get," says Connor Campbell, a market analyst with Spreadex in London.

And, more gains are possible this week we are told.

"The GBP continues to oscillate on political headlines, and risks in the near-term remain two-sided, although heavy short positioning and a large negative risk premium discounted in the currency likely imply larger moves to the upside on positive political headlines," say Barclays. "The more positive tone between the UK and EU supported the pound last week, and a reduction of risk premia could bring mild EUR/GBP downside, although two-sided headline risk is high."

Indeed, the chance of setbacks to the market's improved sentiment on Brexit remains high.

"We have to solve the issue of Ireland and some others in the next six to eight weeks,” Barnier told the Slovenia audience, reminding them of the key sticking point in negotiations.

Prime Minister Theresa May has said the current version of the Irish 'backstop' - an insurance policy to avoid a hard border on the island of Ireland no matter what post-Brexit arrangements emerge - is unacceptable.

The backstop aligns Northern Ireland with the EU’s customs and single-market regulations, creating a potential schism within the United Kingdom of Great Britain and Northern Ireland.

Barnier said negotiators were looking for a solution because the EU was “obliged” to control goods at its external borders.

But, last week we saw the Pound bounce on comments from Barnier that he was open to working on new solutions regarding the border question; markets saw this is a definite concession to try and get the Withdrawal Agreement across the line.

Negotiations are continuing in Brussels before the EU’s 28 leaders discuss Brexit next week at a summit in Salzburg, Austria.

"Sterling prices will continue to dance to Brexit's tune through next week's meeting of European Union leaders in Salzburg, when Britain's EU exit is on the agenda. The Pound could gain if the chances of reaching a Brexit agreement in the fourth quarter appear to rise after the September 19-20 meeting. Or it could beat a rapid retreat if things look less rosy," says Robert Howard, an analyst on the currency desk at Thomson Reuters.

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