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GBP

Brexit: Still more bumps in the ‘Tunnel’?

Oct 23, 2020
Sterling recorded its strongest one-day gain against its major peers in seven months amid a surge in both optimism and relief that the EU and UK will embark on an intensified final phase of Brexit talks. But important gaps remain between the two sides positions and with a deal not likely to be reached until mid-November, there is plenty of time for more volatility.

The stage had been set after the EU’s chief negotiator Barnier said in a speech to the European Parliament yesterday that an agreement with the UK was within reach. Even more positive, he noted that the EU was not out to challenge the UK’s independence, stating that the EU’s stance in talks is ‘fully compatible with the respect of British sovereignty.’ This address seems to have gone a long way to easing tensions between the two sides after negotiations had been on ice since last week because UK PM Johnson had demanded a ‘fundamental’ rethink from Brussels before allowing any further talks.

Deadlines and deadlines

We mentioned in our last Brexit update that it was likely the UK’s de facto mid-October deadline would be breached. This time around there is no set time limit, but the negotiations will take place every day until a deal is reached. The work on a legal text is expected to take two or three weeks and it seems that mid-November is the last time any agreement can be tied up. This would then allow EU leaders to give their blessing at a European Council summit and for ratification in the European Parliament and in legislatures across the Continent if needed.

There is only one real deadline, which is 31 December 2020. EU lawyers have said that it is not legally possible to extend the transition period beyond this date as the UK formally ruled this out in June. While an extension is not expected simply because there is no agreement, it seems it would be possible to find a workaround if both sides do need more time – we have seen already that ‘deadlines’ are highly flexible.

What is left to agree on?

Barnier and his UK counterpart, Frost, have now decided on a 10-point plan for the next and final phase of negotiations. It is noteworthy that there has been much mention of the joint legal text which is usually the final stage of any international agreement and would ordinarily signal that the two sides must be in general agreement across a broad number of areas already.

The outstanding issues continue to be state aid and the wider level playing field (Brussels wants to ensure the U.K. can't undercut the region) as well as fisheries and governance. The UK has signalled it will climb down from its position of having an entirely independent state aid regime, after Frost very recently suggested it could sign up to broad principles and an enforcement mechanism. Indeed, the EU has pointed to recent progress on this issue as a sign that tough disagreements can be overcome. Meanwhile, Barnier has also told EU member states that a compromise on fish will be needed, especially from France and the other sea-faring countries that have put up a strong fight so far.

Few now anticipate the final hurdles to a ‘thin’ deal to be insurmountable, but securing it is always the hardest part as both sides play to their respective audiences and electorates in the desire to be seen as the ‘victor’. Perhaps one concern is that most investors appear to have similar sanguine views over any future posturing and that a deal is now odds on, so anything more than the likely strong rhetoric we may see in the next few weeks will come as a shock with headline havoc along the way.

Market Implications

Positioning in sterling is still light which mitigates against any technical-based flows. Cable has pushed to highs not seen since the start of September and out of its recent range above the previous October highs. After such a strong daily move (+1.54%), consolidation is to be expected and also needed, before more upside and a potential move towards 1.32 with further resistance at 1.3250/65. Upward momentum has clearly improved, but it remains to be seen if GBP can maintain a foothold above this level.

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