Published: December 18th, 2020
Speculation that a Brexit deal between the UK and EU is imminent saw the pound sustain highs against the dollar and euro for most of the week.
However, sterling faced a potentially volatile finish as the EU Parliament set Sunday as the deadline for a deal if ratification before year-end is going to be possible. There were also signs the two sides haven’t got as close to agreement on the thorny issue of fish quotas, despite earlier suggestions a compromise was close.
The Pound-to-Euro rate rose to 1.1057 at mid-week, while Pound-to-Dollar rate rose by as much as 0.90% to hit 1.3444.
MPs in the UK’s Conservative government have been told an announcement will be made Friday if the House of Commons will sit on Monday and Tuesday next week, signalling an announcement will be made then about the success of failure to reach a deal.
Media speculation suggests hardline Bexiteers have been told their concerns are being respected in negotiations. Along with fisheries, there are roadblocks to overcome on the critical issue of a 'level playing field’ between the two markets, whereby the UK and EU would agree to keep to standard rules that respect mutual sovereignty.
If reports are accurate, the UK has managed to avoid ‘lightning tariffs,’ e.g. swift unilateral punishments by the EU if the UK breaks from future EU trade standards. Instead, the two sides have agreed to the basics of a joint dispute mechanism to arbitrate future disputes.
Discussions between EU Commission President Ursula von der Leyen and UK Prime Minister Boris Johnson on Thursday about the status of talks have led to very different accounts. British negotiators are saying that the EU’s stance on fisheries would need to change substantially for a deal to possible.
Johnson released a statement saying negotiations had reached a ‘serious situation’. With time running short it the possibility of no agreement on a post-Brexit trade deal is very real. That would plunge the UK and EU into a trading relationship governed by WTO rules, widely seen as punitive from a UK point of view, and more likely to benefit the EU on balance.
UK negotiators say they’re making every effort to meet the EU halfway on issues around the level playing field, but some primary areas remain hard to overcome, despite getting closer.
The emotional issue of fisheries has the UK side particularly unhappy. Johnson told van der Leyen that Britain would reject an outcome that left it the only sovereign country in the world unable to police access to its territorial waters.
In his statement following the call with van der Leyden, Johnson reiterated that the EU position would need to ‘shift significantly’ in order to seal a deal.
Journalists and analysts have been interpreting the content of off-the-record briefings by the British and European negotiating teams. Taken together, the pieces of a complicated puzzle could be falling into place, though difficult issues are part of the picture. Roadblocks to a happy resolution remain.
Head EU negotiator Michel Barnier said on Thursday that a deal could foreseeably be done, but his hopes were fading with each passing hour. ‘Big stumbling blocks remain,’ he told the press.
Undeterred by mixed messages, markets helped the pound rally on Thursday, with the Pound-to-Euro rate reaching an intra-day high of 1.1132. The Pound-to-Dollar rate, meanwhile, posted a two-year high of 1.3623.
As positive as the gains in GBP/USD may be, GBP/EUR will be the window for viewing the market's ultimate judgement of Brexit outcomes. While sterling held steady against the euro this week, the lack of significant ups or downs could reveal a market unsure about what’s to come.
The Conservative government in Westminster has maintained throughout the talks that it views a no-deal Brexit as the most likely outcome. PM Johnson's most senior minister Michael Gove made the point again this week in a submission to a Parliamentary committee.
But the EU’s patience is also wearing thin, with the president of the EU Parliament saying that MEPs need to see a deal presented to them by Sunday; otherwise, there will be no way to make it law before the transition period expires on 31st December.
Unlike previous ‘deadlines,’ this Sunday really could be the cutoff for a deal. Perhaps that will be enough to spur the two sides to hammer out an 11th-hour deal on the weekend.
If that does happen, expect the market open on Monday to be highly volatile, and see Sterling exchange rates gap higher, or lower.
Forex analysts at Western Union told investors on Thursday that the Brexit outcome will determine the pound’s near-term future, with no-deal sending into a nosedive. Sterling will likely face increased volatility ahead of Friday’s close as markets decide about the direction of travel or interpret new announcements, they added.
Economists at private bankers Julius Baer said a ‘relief rally’ would be certain for Sterling is a deal is announced. Otherwise, more weakness may appear, as markets don't seem to have fully priced in a no-deal scenario.
Under a more optimistic scenario where a deal is agreed, the bank’s short-term forecast, the Pound-to-Euro rate was 1.1365 on Friday.
In other economic news, UK retail sales numbers from the UK's Office of National Statistics show them above their pre-pandemic levels. Volumes decreased by 3.7% from October when many shops closed for a second lockdown, but it looks like spending may have just moved online.