The pound has made gains against three of its major currency counterparts this week, rising versus the euro to a four-month high, US dollar to a two-month high and the Australian dollar to over a four-month high.

In part, this is because there’s been progress in the Brexit negotiations, with the UK signalling changes to the controversial Northern Irish backstop, and the EU eager to examine these proposals.

That said, key UK economic data releases this week, including August’s inflation and retail sales, were somewhat disappointing, while the UK has yet to formally share its legal drafts of these Brexit changes.

Brexit talks ongoing

UK seeks to amend draft Northern Irish backstop

Regarding Brexit, a key development this week has been that the UK government is seeking to amend the proposed Northern Irish backstop.

Under the current draft Withdrawal Agreement, if the UK exits the EU without a deal, then the whole UK must remain in the EU’s Customs Union. While this would respect 1998’s Good Friday Agreement, and ensure peace on Ireland, the UK would be unable to pursue independent trade deals. For this reason, the current proposed backstop is unacceptable to the UK government.

Talk of “all-Ireland agricultural zone” lifts hopes

As a result, it’s thought that the UK government may propose an “all-Ireland agricultural zone”, in which both Ireland and Northern Ireland would follow EU rules for livestock, forestry goods and fish.

This would ensure that lorries crossing the two countries containing agricultural goods wouldn’t need to be checked, avoiding the need for border infrastructure, while other products could be examined elsewhere.

It’s been reported that Prime Minister Boris Johnson may unveil these proposals in greater detail, at the United Nations (UN) General Assembly in New York next week, to EU leaders.

DUP changes tac, signals support for proposals

Importantly, it looks like Mr. Johnson’s allies in Parliament, Northern Ireland’s Democratic Unionist Party (DUP) support these proposals. Until recently, the DUP were opposed to changes that might constitutionally separate Northern Ireland from the rest of the UK.

However, the DUP seems more amenable to these plans for an “all-Ireland agricultural zone”, first because Ireland’s and Northern Ireland’s farming sectors are already closely integrated, and second, because it may support Northern Ireland’s economy.

European Commission President Juncker says “we can have a deal”

European Commission President Juncker says “we can have a deal”

Moreover, it looks like the EU is eager to examine the UK’s proposed amendments to the backstop. Speaking yesterday on Sky News, European Commission President Jean-Claude Juncker said that: “I think we can have a deal.”

Mr. Juncker added that he’s not tied to the backstop in its current form, and is willing to drop it, so long as "alternative arrangements [are put in place] allowing us and Britain to achieve the main objectives of the backstop. All of them".

As recently as last month, the EC President said that the UK’s draft Brexit Withdrawal Agreement couldn’t be reopened, so his comments mark a significant shift. Mr. Juncker is a very senior figure in the EU, so if he’s now willing to renegotiate with the UK, the rest of the EU’s leaders may soon follow suit.

Barnier warns UK not to “pretend” negotiate

However, although there have been lots of reports of Brexit progress this week, they’re just that, reports. So far, the UK and the EU have yet to agree any concrete amendments to the Brexit deal.

To the contrary, the UK government is being secretive about its planned amendments to the backstop. A UK government minister told the Press Association this week that, though the UK has drafted its amendments, it’s not sharing them with the EU or making them public. Supposedly, this is to avoid the EU leaking the plans to the press or “rubbishing” them.

However, this has made some EU leaders wonder if the UK government is just posturing. For example, the EU’s Chief Brexit Negotiator Michel Barnier has warned that the UK shouldn’t “pretend” to negotiate. Also, France’s President Emmanuel Macron and Finland’s Prime Minister Antti Rinne have proposed giving the UK until September 30th to reveal the plans.

With this in mind, Brexit may continue to affect the value of sterling on the interbank markets in the coming weeks.

UK inflation, retail sales arrive below forecasts

Meanwhile, turning to the UK economy, the key releases this week came in below predictions.

To begin, this Tuesday we learnt that UK inflation unexpectedly fell by -0.4% in August, to 1.7%. This is below the Bank of England’s (BoE) official target of 2.0%. Indeed, this week the Old Lady of Threadneedle Street, as the BoE is affectionately known, voted unanimously to keep UK borrowing costs at 0.75%.

Elsewhere, UK retail sales declined by -0.2% in August, beneath forecasts. Shopping on the high street and online contributes significantly to the UK’s GDP (Gross Domestic Product) growth, so this may cause some nervousness about the UK’s economic performance, looking ahead.

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