Above: Mr Antti RINNE, Finnish Prime Minister. Copyright: European Union
– Pound-to-Euro exchange rate @ 1.1268 today
– Pound-to-Dollar exchange rate @ 1.2464 today
– EU looks set to impose fresh deadline to flush out UK’s new Brexit strategy
– Could see Sterling volatility brought forward to end-September
The British Pound is seen coming under pressure against the Euro, Dollar and other major currencies on Thursday, September 19. We suspect a potential reason behind the softness could be that the currency is now facing a new and unexpected pressure-point in the form of a new September 30 Brexit deadline.
Media are reporting European countries want a written plan submitted by the UK by end-September, if the UK is to get a revised Brexit deal.
The plan appears to have been hatched by President Macron of France and Antti Rinne, the Prime Minister of Finland, after a meeting in Paris Wednesday.
Finland are current holders of the Presidency of the Council of the EU, and the move appears to be a clear attempt to flush out Prime Minister Boris Johnson’s plans ahead of the European Council meeting scheduled for October 17.
We had felt the October 17 meeting was a make-or-break deadline for negotiations, and therefore anticipated significant volatility in Sterling around this date.
It appears the UK’s commitment to keep hold of all documents relating to current negotiations, to avoid leaks and counter-briefings by the EU side, has prompted EU leaders to impose a fresh, seemingly arbitrary, deadline.
They want to see the written proposals and start unpicking them now, therefore the move looks to be an attempt to gain the upper hand in negotiations and offer protection against the UK ‘blindsiding’ them in October.
“We need to know what the UK is proposing”, said Rinne. “The UK should make its possible own proposals very soon if they would like them to be discussed.”
Commenting after meeting Macron he adds, “we both agreed that it is now time for Boris Johnson to produce his own proposals in writing – if they exist. If no proposals are received by the end of September, then it’s over.”
The new deadline has not yet been agreed by other EU countries.
If the plan is OK’d by other member states, Prime Minister Boris Johnson could find himself disadvantaged, as once official proposals are submitted we are almost certain they will be shot down by EU officials looking to push back against the UK’s position ahead of the October European Council meeting in order to claw back concessions.
In short, this raises the chance of a ‘no deal’ Brexit in our opinion as Johnson has very little ground to give owing to his avowed ‘red lines’, which draws questions on current levels in Sterling.
“We remain skeptical that deal can be reached never mind legislated in Parliament ahead of the 31 October deadline. We therefore remain cautious on sterling heading into October ahead of the Conservative Party conference and the resumption of Parliament on 14 October,” says Kamal Sharma, a foreign exchange strategist with Bank of America Merrill Lynch.
Johnson has committed to an October 31 Brexit come what may, despite Parliament passing a law that outlaws such an outcome.
Johnson will likely push the boundaries of the UK constitution to deliver on the referendum result and defy Parliament’s wishes, and this would inject significant volatility into Sterling.
“Just over 6 weeks ahead of the Brexit deadline and a month ahead of the all decisive EU summit the negotiations remain deadlocked. GBP investors can therefore only ignore the risk of a disorderly (no deal) Brexit at the end of October with an easy conscience if they are certain that Johnson will adhere to the legislation passed by Parliament requiring him to request an extension of the deadline on 19th October,” says Esther Reichelt, a currency strategist with Commerzbank in Frankfurt.
Reichelt says “the decisive question” for Sterling exchange rates remains whether or not a ‘no deal’ Brexit at the end of October “is de facto off the agenda”.
“A glance at the EUR/GBP exchange rate might easily mislead interested market observers. As in our view the developments surrounding Brexit do not justify a GBP rally we have seen since mid-August,” says Reichelt.
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Markets are however yet to show their fear on the latest developments, perhaps wisely so, as the Pound would undergo a significant rally if the EU and UK were to infact clinch a deal that was in turn ratified by the UK Parliament.
While the EU accuses the UK of not having a plan – one only needs to recall Monday’s press conference by Luxembourg Prime Minister Xavier Bettel – there are certainly attempts to get a deal underway.
The Times this morning reports Simon Coveney, the Irish deputy prime minister, revealed significant and “regular” informal contact with British cabinet ministers.
“I’ve met Stephen Barclay, I’ve met Dominic Raab, I’ve spoken to Michael Gove at length. I meet and speak with Julian Smith on a regular basis. We had dinner last night in Dublin and spoke for two or three hours,” he said.
Meanwhile Arlene Foster, the DUP leader, met Leo Varadkar, the Irish prime minister, in Dublin last night to discuss Brexit. The DUP has signalled that it could shift its red lines to allow some checks at ports on goods entering Northern Ireland.
The DUP are central to current negotiations, as any new deal accepted by the DUP would likely whittle down the opposition to a fresh deal in the UK parliament and make the passing of a Brexit deal all the more likely.
In a speech in Dublin on Wednesday, DUP leader Arlene Foster said that a “refit” of Northern Ireland’s 1998 peace accord would represent an important step forward in delivering a Brexit deal they could accept.
“We believe, with flexibility on all sides, that solutions can be found that will not on the one hand erect new barriers to trade within the United Kingdom while not damaging the integrity of the EU Single Market,” Foster said.
“We are prepared to be flexible and look at Northern Ireland specific solutions achieved with the support and consent of the representatives of the people of Northern Ireland,” she added.
German Chancellor Angela Merkel meanwhile said on Wednesday that Britain could still leave the European Union in an orderly fashion.
“I still see the possibility of an orderly Brexit,” Merkel told a news conference. She reiterated that Germany was prepared for a no-deal Brexit but would prefer an orderly Brexit with a deal.
Merkel has turned out to be one of the more supportive voices in Europe over getting a deal, adopting a measured and constructive tone on the matter.
As Germany is the European powerhouse, economically and politically, we feel this is a positive for Johnson’s attempts to strike a new accord.
It could therefore too soon to press the ‘sell’ button on the Pound just yet.
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