As Brexit trade talks approach, investors’ concerns that the UK and EU will not reach a deal are being reflected in a weaker pound to euro and pound to dollar. Pound to euro is trading at 1.1095 and pound to dollar at 1.2330 following spikes to 1.1257 and 1.2360 earlier this week.
UK Chief Brexit Negotiator David Frost said that the EU must change its position if a deal is to be reached as the current EU mandate is not one that the UK can agree to. Whilst Frost’s comments were firm and do not inspire confidence that a deal can be struck, Frost also noted that there is still a long way to go and that negotiations are at a relatively early stage.
Without a change in the EU mandate or the UK caving into Brussel’s demands, it is difficult to see how progress can be made at next week’s negotiations. Hence, we may have to wait until prime minister Boris Johnson travels to Brussels in mid-June before we get any real insight into whether a deal can be reached. EU leaders will meet at the EU Council’s meeting to discuss Brexit progress and Boris Johnson is expected to meet with them in the days that follow.
It is here that Boris will hope to convince EU leaders that the only way a deal can be reached is if the current EU mandate that EU Chief Brexit Negotiator has is amended. Despite the EU openly admitting that they would be open to a 2 year extension, Boris will likely confirm that the UK will not extend the transition beyond the current period. Mr Johnson won a landslide victory in December’s election on a manifesto that stated he would get Brexit done and this time round, he seems to want to stick to his word.
One of the key sticking points in the negotiations is access to UK fishing waters. The EU is insisting that continued access for their nation states is granted as part of any trade deal, but the UK wants to control its own waters and grant access on an annual basis. There has been rumours that the EU may be willing to compromise on this area, which provided the pound with a boost earlier in the week, but how much the EU is prepared to move, is another question.
What Lies Ahead for Pound to Euro Exchange Rates?
The direction of pound to euro will be heavily driven by trade talks next week and the prime minister’s trip to Brussel’s mid-June. Signs that the UK-EU can progress their trade talks will boost the pound but if the UK-EU are unable to move on from the current status quo the pound will fall. Markets will be reactive to snippets of information and markets are likely to be volatile.
If no progress is made next week then there will be enormous pressure on Boris Johnson and EU leaders later in June to show compromise. If neither camp is willing to budge and the UK refuses to extend the transition period, this will put the UK-EU on a path to trade on World Trade Organisation rules next February.
As we’ve seen previously, closer integration with the UK-EU provides the pound with support and a move further away causes the pound to fall. Thus, if the chance of a no-deal Brexit increases then expect pound to euro to fall. When the UK has moved close to no-deal previously, pound to euro has fallen to 1.06 and pound to dollar to 1.20.
Can the UK-EU Break the Deadlock?
Michel Barnier, the EU’s Chief Negotiator is learning fast that the UK’s Brexit negotiating team is a very different team to that of Theresa May’s team, which was led by Europhile Oliver Robbins. There are fundamental differences between the two positions, and it is difficult to see how progress can be made next week.
This time round, the UK has a much stronger negotiating team and after a crushing electoral victory in December, has the support in parliament, something Theresa May certainly did not have. The EU is seeking to maintain as much control over the UK as possible but has found itself unable to strike the same fear into Frost’s negotiating team.
Instead, it is Michel Barnier who has become increasingly frustrated and negotiations have stalled. The UK is saying that it wants to be treated in the same manner that any other sovereign nation is treated when negotiating a free trade agreement, something the EU seems reluctant to acknowledge.
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