GBP At Risk: Brexit Negotiations Ongoing This Week
GBP has been on a mad one this week, the currency shooting above the 1.3200 mark for the first time since before the pandemic went global in February, triggering financial market panic and a flight to safety (namely, to USD). Though GBPUSD is a little softer today, strong support seems to have been found and, technically speaking, GBPUSD seems to be priming itself for further upside.
However, one BIG risk looms over the outlook for GBP. I’m sure you all know what I am talking about… Brexit!
The UK is set to leave the EU common market at the end of the year (when the “transition period” ends). Thus, UK/EU negotiations on the future relationship are ongoing, but so far we have had no clear signs of any breakthrough. If no deal can be agreed by the end of 2020, the UK and EU will have to trade with each other on WTO terms, meaning tariffs and border checks.
While this would be viewed as a negative for the EU economy, it is seen as a disaster for the UK economy – trade with the EU makes up roughly 45% of the UK’s total. Therefore, as the probability of no deal rises, the drag on GBP becomes greater, reflecting the rising risk of this “worst-case scenario” outcome.
In terms of recent rhetoric from both sides; UK Brexit Negotiator Frost has sounded optimistic that a deal can be reached in September. EU Brexit Negotiator Barnier does not share this optimism, and has said that he does not expect a deal.
However, sources quoted by a BBC reported today suggest that this might be Barnier’s way of putting on a front, and trying to look tough in order to secure a better deal with the EU; reportedly, the EU thinks a post-Brexit deal is still more likely than no deal. Moreover, France is worried that EU's Chief negotiator may "be tempted to give away too much" as he is keen to be seen to get the deal done with the UK.
In terms of the key sticking points still holding up negotiations, you have; fisheries (the EU is demanding continued access to UK fishing waters, the UK is saying no), level playing field (the EU is demanding that the UK sign up to some EU regulations if it wants access to its market) and state aid policy (the EU is demanding that the UK sign up to EU rules on state aid for companies if it wants access to its market).
Moreover, an overnight report from the FT alleged that demands for continued wide-ranging EU access for British truckers might become another sticking point.
Clearly there is a long way to go in these negotiations.
Should we see a best case scenario unfold, i.e. as UK Brexit Negotiator Frost hopes, if a deal is reached in September, you would likely see a HUGE rally in GBP and its recent gains would be more than justifiable.
Conversely, if talks drag on with no avail into October (at the end of which there is an unofficial deadline to get a deal done before the EU’s final Council Summit meeting of the year), we could see GBP getting increasingly shaken. At this point, the clock towards no deal will really be ticking.
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