Optimism of the UK and EU reaching an agreement has increased following Irish Prime Minister Michael Martin’s comments to Bloomberg that both sides could now see “the landing zones” although the UK government still claim significant divergences remain.

The crux of the problem has not changed, state aid and fisheries remain the two contentious issues with fisheries being the more politically difficult. The Telegraph has reported that Prime Minister Johnson is not prepared to become the next Ted Heath. Ted Heath famously agreed to the European Economic Community’s demand for equal access to UK waters for the original 6 nations back in 1971, a decision many Conservative MPs have never forgotten.

At present, the UK’s share of cod and haddock off the coast of Cornwall is less than 10 percent compared to the French share of more than 70 percent. Tory Brexiteers will not accept a continuation of the status quo. Brexiteers have long argued that Brexit is about sovereignty and “taking back control”. As such, the EU must recognise that as an independent coastal state, it is the UK that controls its waters. It is ironic that after several years of poking at Boris, it is French President Emmanuel Macron who now wants to “have his cake and eat it”.

Brexit fishing

The UK is keen to agree access to fisheries on an annual basis and has suggested a phased change in access rights to the EU over several years, much to Nigel Farage’s displeasure. The UK has also recently suggested it may be willing to look at agreements for longer than the current proposed annual basis in an olive branch to the EU. On the EU side, German Chancellor has put pressure on Macron, and it is understood Macron has now confirmed to French fishermen they cannot expect to maintain the same access rights to UK waters. However, despite these small compromises, we are a long way from common ground. The question is, if the EU’s level playing field request can be resolved, would the UK and EU walk away from a deal for something as economically small as fisheries?

Another unofficial deadline passes as EU leaders meet for virtual summit

EU leaders will meet at their virtual Summit today although there won’t be a Brexit deal for them to see. Michel Barnier who updated EU leaders yesterday at a briefing has little to report. Brexit is not formally on the agenda today, but it was hoped the UK and EU would’ve reached an agreement by now. Instead, both camps continue intense dialogue in the hope of reaching an agreement early next week, as recently reported by the Sun newspaper. Instead, Barnier will brief EU nations Friday morning.

Official Brexit updates have been almost non-existent as both Chief Brexit negotiators Frost and Barnier remain tight-lipped about what is really going on behind closed doors although markets are tending to interpret no news as good news. Ultimately, for a deal to be struck, compromises from both the UK and EU will need to made, none of which will be welcomed back home by Tory backbenchers or EU states so a lack of transparency to the media may not be such a bad thing.

Whilst the UK and EU continue to cite significant differences, this almost theatrical pantomime will make any eventual deal appear that greater achievement. In fact, before every Brexit agreement over the past 4 years, the UK and EU have voiced their differences and lack of optimism on the negotiations, only to see an agreement magically follow shortly afterwards.

Lastly, the economic impact to the UK of trading on World Trade Organisation rules (aka no deal) is estimated to be just 3 percent over 15 years, which equates to just 0.2 percent per annum, according to the government’s own modelling of the two outcomes. The benefits of many FTAs tend to be exaggerated for political purposes so the question will be, is the relatively small economic gain worth the compromise on sovereignty?

What impact will a Brexit deal have on the pound?

What impact will a Brexit deal have on the pound?

It is widely expected that a deal between the UK and EU will cause a rally in the pound although there is divergence in what gains can be made with some analysts seeing a significant upside and others seeing a small advance at best.

A comprehensive trade agreement would likely push the pound to higher levels as certainty over the UK’s largest trading partner resumes and reduces the possibility of the Bank of England moving towards zero or negative interest rates. However, time is fast running out and the longer negotiations continue, the more likely we are to see a barebones deal covering the basics, with future add-ons likely.

Nevertheless, a trade deal of any type is likely to push the UK currency higher as it would signify closer alignment to the EU. Investment banks BNP Paribas and Goldman Sachs have both recently forecast a pound to euro level of 1.15 on the back of a UK-EU trade deal but not all analysts share this view. HSBC for one, see a weaker pound, even in the event of a trade deal, which really bucks the trend of almost every other analyst. HSBC suggest that greater frictions in doing business with the EU and the impact to the UK economy caused by the coronavirus pandemic are likely to leave the pound lower. By comparison, HSBC see the pound to euro exchange rate at 1.11 by year end, even with a deal.

Covid vaccine hopes likely to benefit pound to dollar

Pharmaceutical firm Pfizer has confirmed its vaccine is 95 percent effective with success rates in those above 65 years of 94 percent. This latest news in conjunction with results published by pharmaceutical giant Moderna have eased fears over rising infections and supported and a move higher in the pound to US dollar exchange rate.

The UK was arguably one of the worst hit countries in Europe when the pandemic struck so light at the end of the tunnel will help support the struggling currency, particularly against the US dollar which is widely regarded as the global safe haven and as such as confidence grows that the global economy can beat this pandemic, funds will flow out of the US currency allowing the pound to climb.

Finally, interestingly and worryingly, it has emerged that government advisory agency SAGE relied on Wikipedia to model their forecasts for the first lockdown. One SAGE member reported the Democratic Republic of Congo was better at gathering data on Ebola than the UK was on coronavirus. The report also confirmed there were no experts on human coronavirus advising the government in the run up to the first lockdown.

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