Published: December 6th, 2020
The Pound held onto gains made last week as forex traders continued to believe a Brexit deal is in the offing, despite the brinkmanship on display in UK-EU trade talks over significant issues like fishing quotas.
GBP/USD rose 0.25 per cent at the start of the week to reach highs of around $1.3346.
Reports have suggested the EU is fed-up with what it sees as an intransigent UK negotiating position and is ready to kick-off no-deal contingency plans as soon as next week if 11th-hour crunch talks don’t find a breakthrough on sticking points like quotas on fishing.
Last week the EU offered to return between 15 and 18 per cent of Europe’s fishing quota, meaning fish caught by European fleets in British waters, back to the UK as part of a new post-Brexit trade agreement. While it represents a slight softening of the previous Brussels position, it’s a far cry from the 80 per cent being demanded by UK negotiators.
While both sides were expected to find a way past the deadlock, other sticking points remain. They include agreeing a level regulatory playing field for British and EU firms operating across the Channel, a potential minefield of disagreements that could scuttle hopes for reaching an agreement this week.
Though the EU’s latest concession on fish quotas was poorly received in London, progress would come later in the week. Meanwhile, analysts at Daiwa Capital told investors that broader governance and level playing-field trade issues remained vital, with an agreement on fundamentals still some ways off.
The clock is ticking for both sides with under a month to go before the Brexit transition period ends on New Year’s Eve. If the EU and Britain fail to reach an agreement before that deadline, British firms will have to sell products and services into the EU under less accommodating, and higher-tariff, terms set by the World Trade Organisation.
EU watchers have told the press that this week has been widely seen as the de facto deadline for the major elements of a new trade deal. Agreement has to be reached on the big irritants by Friday if lawyers for both sides are to have enough time to finish the fine details of the text and then translate everything into 24 EU official languages before New Year’s Day.
The standoff at the start of the week on fishing rights added to the sense of tension, and ambiguity over the likelihood of reaching a deal. German Chancellor Angela Merkel has weighed in several times, amplifying the bloc's position that while a deal is in everyone’s best interests, the EU has no intention of acceding to the UK’s demands.
‘A deal at any price is not part of our strategy,’ she told reports this week said.
On Thursday Sterling surged again on reports that progress had been made on fishing quotas, raising hopes that a post-Brexit EU-UK trade deal could be in sight.
GBP/USD jumped 0.64 per cent to $1.3446 and had briefly touched $1.35.
The news of a possible compromise on fishing quotas suggested the UK could hang onto increased stocks of fish sold on British shores, and the EU could maintain similar quotas on fish species that are less popular in the UK.
Reports of a breakthrough on re-patriating fishing quotas came just a few days after EU chief Brexit negotiator Michel Barnier's suggested giving back about 16 to 18 per cent of the fish caught in UK waters by European fleets. This proposal was soundly rejected by Westminster, which wants 80 per cent.
As the Dec. 31 end of the transition period nears, forex traders and other market participants have had to analyse a flurry of mixed signals and news leaks related to the Brexit talks which have driven price movements in the Pound.
The potential breakthrough on fishing rights and quotas comes after months of brinkmanship and stalemate, but other regulatory issues continue to dampen enthusiasm over the likelihood of a deal.
The Sterling to Aussie (GBP/AUD) exchange rate was also up late in the week, trading at ca. AU$1.806 on Friday morning.
The growth in GBP came as UK-EU trade talks were said to be down to the wire.
British PM Boris Johnson announced that London had lowered demands and asked EU fishing fleets to return 60 per cent of the value of their fish stocks instead of the previous British demand for 80 per cent.
While it's a long way off from the 18 per cent currently on offer from Brussels, it marks a significant movement in the UK's negotiating position. That's raised hopes that both sides might find a way to secure a Brexit deal before the end of the transition period on New Year’s Eve.
In neighbouring Ireland the government said the EU should hold its nerve and support chief negotiator Michel Barnier, adding that there is a solid chance of getting a deal across the line before next week.
As Brexit negotiations reach their endgame, the Euro posted its third consecutive day of gains.
Despite weak Eurozone PMIs announced last week, EUR/USD stayed in positive territory. ECB policymakers, however, must be worried about soft services sector data. With numbers well below the neutral 50 level, it signals further declines in business activity.
With Europe still struggling to contain the pandemic, analysts said the prospects for improvement in business outlook seem some way off. The picture was brighter in manufacturing, where PMIs indicated expansion.