Sterling Continues to Dance to the Brexit Beat

The last 7 days have been critical in the process of Brexit negotiations, as agreement on the three key ‘divorce issues’ has progressed sufficiently for all parties to agree to continue to the next phase of the negotiations.  However, as is inevitable in multi-lateral government negotiations, information leaks out about stumbling blocks as they arise, and those headlines have lead the markets on a merry dance indeed.


GBPUSD Intraday Chart (1 week)

Source: Bloomberg


Tuesday: Ireland Given Veto Power – GBP Tumbles

On Monday of last week negotiations seemed to be making good progress, which buoyed GBP, but then on Tuesday cracks in the process became evident as Ireland was effectively granted veto power by European Council President Donald Tusk.


“Let me say very clearly. If the UK offer is unacceptable for Ireland, it will also be unacceptable for the EU,” Mr Tusk said at a press conference alongside the Irish Prime Minister Leo Varadkar in Dublin.  Northern Ireland had originally voted to remain in the EU, and this latest development caused concern for the markets, sending GBP back down after Monday’s rally.


Thursday/Friday: Divorce is always messy, but progress has been made – GBP Jumps Up

As in  most divorces, Brexit began with a fair degree of acrimony on both sides, but now has progressed to acceptance that this is going to happen so let’s try to take emotion out of the equation and work towards agreement on key issues.  The aforementioned three ‘divorce issues’ are;


On the first, Theresa May and her EU counterparts agreed on Friday that the UK would maintain ‘regulatory alignment’ with the EU on issues that are referred to in the Good Friday Agreement, and conceded that there will be neither a ‘red line through the Irish Sea’ nor a hard border.


On the financial settlement, there had been a fair bit of distance between what the UK is willing to pay and what the EU was looking for. Foreign Secretary Boris Johnson was quoted saying that the EU could ‘go whistle’ when asked about a settlement in the £60-100 bio range.   However it now seems like there has been a middle ground found in the £40 – 45 bio area.


On EU citizen’s rights, the text of the agreement showed disputes involving EU citizens in the UK can be referred to the European Court of Justice for eight years, far longer than UK wanted, and a likely flash-point with Brexit-supporting Tory MPs, but a concession that made the EU negotiators happy.


So everything looked rosy on Friday as agreements were reached on these issues, which pushed GBP back up to the week’s highs, and the market sensed some relief is at hand.  However, then came the weekend and more comments from politicians on both sides.


Saturday: UK Chief Brexit Negotiator On The Wires – GBP Dips Again

Over the weekend Brexit chief negotiator David Davis surprised the markets by saying that the terms agreed on Friday were not legally binding, resulting in many outraged comments from the EU side, and sending GBP tumbling once again.  Although he clarified his position, the damage had been done.  Add to that headlines in the press saying that the UK would lose 10,500 jobs on day 1 of the UK / EU split, and GBP remains soft.


Next on the Set List, Phase 2: Time to Hit The Dance Floor Again!

The next phase in the process are negotiations on the transition to UK independence which will begin in January and will hopefully lock in trade and cooperation for the medium-term future, preventing an exodus of business and investment from the UK.


The dance continues!


Author: John Glover


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