Pound / Dollar Rate Approaches 2021 Lows, UK Readies to Trigger Article 16 say Reports

File Image of the UK's chief trade negotiator, David Frost. Image © Gov.uk, 10 Downing St.

It's a busy week for Pound Sterling, not only did the Bank of England strike it down with a lightning bolt but now it has to contend with heating Brexit tensions.

Pound Sterling Live reported midweek that issues concerning the Northern Ireland protocol were pinging on the UK currency's radar, but as yet it was not a major driver and merely one to watch.

Fast forward to the end of the week and Brexit tensions cannot be ignored by markets amidst reports the UK is now seriously considering raising pressure on the EU over a deadlock in discussions over Northern Ireland.

Arriving in Brussels on Friday UK Brexit minister David Frost said he hopes to make some progress on outstanding issues, "but honestly the gap between us is still quite significant, but let’s see where we can get to."

"We’re not going to trigger Article 16 today, but A16 is very much on the table and has been since July. Time is running out on these talks if we are to make progress, we need to make progress soon and our preference is to make progress and see if we can reach an agreement," Frost told media.

The developments raise the prospects of a trade war between the two sides and puts Brexit tensions on Sterling's menu just as it struggles to digest the previous day's surprise served up by the Bank of England:

The Pound to Dollar exchange rate is down 1.83% this week at 1.3431 and looks braced to test the 2021 low at 1.3411.

• GBP/USD reference rates at publication:
  Spot: 1.3638
• High street bank rates (indicative band): 1.3260-1.3360
• Payment specialist rates (indicative band): 1.3520-1.3570
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

Media are reporting there are now signs the UK government is closer to triggering Article 16 of the Northern Ireland protocol than it is publicly discussing.

Sky News says a key government committee is to now discuss "Article 16 readiness in a sign big clash with the EU getting closer".

The committee known as GB(O) has Article 16 readiness on the agenda, it is reported.

The EU and UK are currently in negotiations aimed at smoothing trade between Northern Ireland and the rest of the UK, with the UK saying the EU's rules and strict interpretation are posing significant barriers to trade.

The UK is also unhappy that oversight of the Northern Ireland protocol is provided by the European Court of Justice, an inherently EU institution.

By threatening to invoke Article 16 the UK is signalling it is unhappy with the direction of current negotiations.

Article 16 allows either party to undertake unilateral safeguarding measures if the protocol leads to "serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade".

It is interpreted as a drastic move that could invite retaliation from the EU.

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Sky News also reports the EU also believes triggering Article 16 is now likely, with some senior figures suggesting the talks were going "into a ditch".

As such, "EU figures may entirely refuse to negotiate further with Britain in the event Article 16 is used, and just begin retaliatory measures."

Tony Connelly, RTE's Europe Editor, says there’s a belief that the UK may be miscalculating the EU’s response, ie that we’ll get into a slow period of legal action in which the UK suspends its Protocol obligations and things will then drag on thru a process.

"However, the view is that the EU’s response could be much swifter and more “radical” than expected," he says. "This could include termination of the TCA, or a suspension, which would require respectively 12 and nine months notice."

Cabinet ministers have reportedly told MPs that the triggering of Article 16 could come as early as mid November, after the COP climate change summit.

For the British Pound, a worst case scenario would be the entire Brexit agreement is suspended, although other retaliatory measures are more likely.

Regardless, political uncertainty will demand a premium on holding Pound Sterling, placing downward pressure on the currency going forward.