Brexit Trade Talks Send Pound to Euro Higher

GBPEUR: Sterling Loses Ground Ahead of Rates, Election

The UK and EU have edged closer to a Brexit trade deal following high level discussions by UK prime minister Johnson and senior EU leaders, sending pound to euro and pound to dollar rates higher. Pound to euro pushed through 1.12 before easing back to 1.1150 by close of play and pound to dollar neared 1.27 before falling back to just below 1.26.

Both the UK and EU confirmed there would be no extension beyond the current transition period but committed to a series of face-to-face talks next month. Boris Johnson met with EU Commission president Ursula von der Leyen, EU Council president Charles Michel and EU Parliament president David-Maria Sassoli on Monday in order to break the deadlock, and those with knowledge of the conversation on both sides reported constructive progress.

It has been reported that Michel Barnier has indicated that the EU is now willing to recognise the UK as an independent coastal state and as such, look at the EU’s access to UK fishing waters on an annual basis. Fishing rights has been one of the two major obstacles with neither camp willing to budge from their strict red lines. The EU had insisted that fishing access for EU states be maintained in its current form and a Free Trade Agreement would only be possible if this was the case.

It is understood that Boris called on the EU to review its red lines in the video conference call. This development marks a significant change in tone for the EU following comments less than two weeks ago from Michel Barnier when he said it was technically impossible to reach a Free Trade Agreement (FTA) unless EU fishing access was preserved.

Whilst this break has been communicated to diplomats, it is unlikely it will appear until other aspects of the deal have advanced, to avoid early objections from the French and other EU fishing nations. With a compromise on fishing rights now looking likely, the focus will turn to the “level playing field” which the EU has insisted on. It is understood that Ursula von der Leyen has said that there will need to be level playing field guarantees as without this, EU member states will not sign off the final FTA.

However, Boris has stated repeatedly that the UK cannot sign up to the EU’s level playing field demand as it would commit the UK to EU rules and regulations without any say in how those rules are made. Therefore, whilst the EU’s concession on fishing rights has offered markets some confidence over a future UK-EU trade deal, we are a long way from having an FTA in place and the risk of the UK-EU trading on World Trade Organisation rules next year cannot be disregarded. This cautiousness was reflected in pound to euro and pound to dollar exchange rates as both retracted after spiking initially.

When Will a Brexit Deal be Done?

Brexit progress was clearly good news for the pound and whilst negotiations will be tough, most expect the UK-EU to have an FTA in place before the end of the year. However, the UK are keen to have an agreement in place as soon as possible. Mr Johnson said, “We see no reason why you shouldn’t get that deal done in July.” By comparison, the EU have set late October as a deadline which is the latest point at which a deal could be reached as the European Parliament will need time to ratify any FTA.

Behind the scenes, UK and EU diplomats are concentrating on reaching a deal between mid-August and mid-October, the time of which will likely be subject to breaking the “level playing field” deadlock. Also, whilst an FTA with the EU is a primary focus for the UK, the EU has other problems in its path. Firstly, the EU is currently trying to map out its 7-year budget without the UK’s coffers, a sensitive issue when the only other significant net contributor is Germany, which has caused tension between different states.

Secondly, the EU has still not agreed a sufficient COVID-19 rescue package. The latest EU Commission €750 billion rescue fund would be built within the 7-year budget and would come into effect next year, however there is still concern over how this is funded, and the northern states share opposite views to those states in the south.

Lastly, the German supreme court recently ruled that the ECB’s quantitative easing programme between 2015-2018 was illegal, putting the EU’s largest economy at odds with the ECB. Germany has threatened to pull out of further bond-buying and sell existing bonds if the ECB cannot provide a satisfactory response by early August. Of the 3 issues, this is perhaps the problem which has the potential to be the most explosive.

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