Sterling fades through “backstop” deal
Ken Odeluga March 19, 2018 7:00 PM
Britain and the EU’s “backstop” agreement to avoid a harder border for Northern Ireland does not guarantee “backsliding” can be avoided
Britain and the EU’s “backstop” agreement to avoid a harder border for Northern Ireland does not guarantee “backsliding” can be avoided, but sterling buyers have applauded the best hope yet.
Much ambivalence remains around whether or not Britain will effectively be painted into a corner by a combination of opposing political forces, deadline pressure and the sheer complexity of negotiations over Ireland. As ever, these were largely reflected in sterling. The pound raced almost 200 pips higher against the dollar from opening levels as signs of the accord emerged. It had given back a fifth of the move later, still comfortably on the $1.40 handle, but trading nervously. Sentiment on the more pertinent EUR/GBP pair was just as indecisive. The single currency had recovered around a quarter of a penny after the rate touched a near six-week low earlier. Demand for option deals to insure cash during and immediately after this week’s EU Summit remained elevated. Additionally, earlier benchmark gilt losses were trimmed, with yields returning 55 basis points of their biggest move since early-March, suggesting short-term sellers took profits.
Indeed, whilst the EU’s chief negotiator Michel Barnier described the accord as “decisive”, after talks with UK Brexit Minister David Davis, he also stressed it was not legally binding and would remain so, unless a complete treaty is ratified before the UK formally leaves the European Union at the end of March 2019. However, whilst referencing the prior formula about Ireland that Prime Minister Theresa May rejected earlier, the agreement now notes Britain has accepted the EU’s protocol on “Ireland/Northern Ireland”. In other words, the agreement still rejects the original deal, but agrees that another form of the same deal will be acceptable for a full agreement. Furthermore, the solution as part of the Withdrawal Agreement will “apply unless and until another solution is found”. Essentially, prospects that an EU/UK customs union could be extended for 21 months beyond Brexit have taken a significant stride forward.
Investor attention remains on interest rates
Admittedly, scope remains for new-found constructiveness in negotiations to fall apart at this week’s Summit. It is also conceivable that Theresa May could face fresh murmurs of cabinet disquiet after Eurosceptic colleagues had pointedly not rocked the boat in recent weeks.
Even so, the unabashedly cheerful manner in which the draft agreement was publicly acknowledged by senior European Union negotiators indicates an increase of goodwill that can be drawn on when negotiations become snarled again. This is one reason why business groups have cautiously welcomed Monday’s news. Nevertheless much of UK Plc. will follow the lead of accountancy giant KPMG which said it would “make little difference to…Brexit planning”. We note that futures contracts with June expiry on Britain’s FTSE 100 and FTSE 250 indices ticked higher in reaction to Monday’s headlines but remained in the red. The underlying markets had more of an eye to pressure on exports from a recovering pound as well as monetary policy decisions due this week on both sides of the Atlantic.
In short, business and markets remain sceptical. And whilst this week’s European Council meeting is billed as a gathering on “Jobs, growth and competitiveness”, it will now focus even more exclusively on the Brexit transition deal. Outcomes will play an important part in deciding business and market direction for months to come.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.