The British Pound starts the new week in subdued fashion as the summer rally against the Euro, Dollar, Australian Dollar, and other peers fade ahead of what is being billed as a potentially ‘ugly’ Autumn for the UK by on analyst.
Perhaps the most important consideration for Sterling on the near-term horizon will be this week’s penultimate round of Brexit trade negotiations which are to take place in London amidst subdued sentiment.
It appears that the two negotiation teams have gone as far as they possibly can under the terms of the briefs provided to them by their leaders, and it will therefore most likely take politicians to break the deadlock.
Indeed, the UK’s Chief Negotiator David Frost said at the weekend:
“From the very beginning, we have been clear about what we can accept in these areas, which are fundamental to our status as an independent country. We will negotiate constructively but the EU’s stance may, realistically, limit the progress we can make next week.”
It appears that time is no longer the constraining factor as the ‘red lines’ held by the EU and UK appear to have converged around the areas of fishing rights and state aid rules (the so-called level playing field provisions).
Foreign exchange markets have turned more cautious on the Sterling heading into a period that was always likely to be beset with Brexit tensions and the upside potential is only likely to be revived if negotiators reveal unexpected progress this week.
With Frost openly saying there is limited chance of progress this week we will be on the lookout for headlines to come at any time that talks have wrapped up early, given the impasse.
This could provide a knee-jerk downside move in Pound exchange rates.
Last week it was reported Downing Street now sees a 30-40% of a deal being reached, which we noted was likely less than the market was expecting (analysts are currently putting the market’s expectation around 60%). Therefore, if the market lowers its expectations over the coming days the Pound could shift lower as a result.
Stephen Gallo, European head of FX strategy at BMO Capital Markets says the recent rally in the Pound-Euro exchange rate “should be treated with caution ahead of autumn ugliness.”
Any knee-jerk negative reaction to headlines out this week will however likely be short-lived given that the deadlocked state of negotiations have been well signposted to the markets which appear to be of the view that the breakthrough would only ever really come from the politicians.
For this reason, October’s meeting of EU leaders at the next scheduled European Council summit is being billed as the real make-or-break moment for talks.
Goldman Sachs economists meanwhile expect Brexit negotiations to conclude with a “thin” free trade agreement, including a lengthy implementation phase during which some current EU-UK arrangements are preserved – i.e., in data, aviation and security—and the imposition of significant barriers to trade in services is gradual.
EUR/GBP LONG (Buy)
ENTER AT: 0.89901