Sterling has moved sharply overnight on the news that the UK has agreed a last minute deal with the European Union (EU) to continue the Brexit negotiations on to the next phase.
This week has been dominated by the ‘hard border’ issue between Northern Ireland and the Republic of Ireland (RoI). If a hard border had been implemented it would have meant border checks having to be reintroduced to monitor movement between jurisdictions operating under the two different regulatory systems.
An agreement had looked to have been agreed early on Monday (4th) but that was put in doubt after the Democratic Unionist Party (DUP) opposed the specifics of the deal. Theresa May’s government rely on the approval of the DUP following their coalition after the UK election result. The guarantee there will be no regulatory barriers between Northern Ireland and the UK is not just welcome to the DUP, it is also hugely significant for Ireland. The UK is Ireland’s single biggest export market with annual trade including sales of beef, dairy, pharma and services reportedly worth around £50bn a year.
However, after three days of negotiating it now looks like an agreement has finally been reached. Jean-Claude Juncker (EU President) did however note that negotiations had been “…difficult for both the UK and the EU…” and that “Today’s result is of course a compromise”.
We are going to see plenty of volatility in the coming months as the Brexit negotiations continue to unravel. Currency markets generally react positively on ‘resolution’ or ‘certainty’ so it is no surprise to see Sterling perform how it has on the news. But the full details must be scrutinised. Just because an agreement has been reached, doesn’t necessarily mean it’s a good agreement.
All of this positivity around Sterling has been on the back of a c.3% move in the last 7-10 days. Initially the Pound pushed higher upon reports that the UK and the EU made a breakthrough on the Brexit bill (28th November). The reported settlement in principle figure – or how much money the UK will pay the EU after leaving the Union – ranges from €45-€55bn (The Telegraph) and represents the UK bowing to EU pressure on the so-called divorce bill in a bid to start trade discussions. However, the UK agrees total liabilities worth €100bn, but will aim to pay less than half of this in net payments over the long term.
Brett Thomas, Head of Dealing at Godi Financial, has said reaching an agreement on both the divorce bill and the Northern Ireland / RoI border deal in quick succession is key for the Brexit negotiations to progress on to the second phase and a future trade deal. The UK can now provide solutions and assurances around citizen rights.
Following reports that an agreement had been reached on the border deal, sterling rallied aggressively in FX space, with GBP/EUR reaching highs of 1.1505 – levels last seen back in June. It is now 7% from its lows of 1.0740 back in August.
Brett Thomas commented:
“As we have consistently seen since the pound’s collapse following the referendum back in 2016, any perceived positive news around Brexit has proven beneficial for Sterling. Ultimately markets and investors desire stability and certainty, and any breakthroughs in the Brexit process that may potentially pave the way for a smooth transition, would be welcomed by the markets in general.
It’s important not to get too carried away, as recent history proves things can change very quickly and businesses with currency market exposure can be caught short if hedging is not part of their financial strategy. The terms still requires agreement from all 27 of the EU member states. However, this latest news does seem to be a positive development in an already uncertain and complicated process.”