GBPUSD, H1
Sterling is firmer, with Cable having lifted above 1.2900 and 1.3000 to peak at 1.3015 (R2) as USD weakens to start the week. EURGBP tipping back under 0.9050 to 0.9025. The market saw through Boris Johnson’s high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU’s Barnier and the UK’s Frost due to hold a video conference later today. The consensus expectation remains for a limited deal to be produced by mid November. On fishing, a principal sticking point, a simple win-win versus lose-lose choice should mean a compromise is found. The fishing issue is largely symbolic for both sides. The UK fisheries industry has 12,000 workers employed directly and would like full access to the EU market to sell its fish – in return the EU wants full access for its boats to fish in UK waters. British negotiators say that’s not possible because the UK is now an independent coastal state. These positions have remained unmoved for months. Fishing makes up only a tiny part of the economy on both sides, but it was a big part of the Leave campaign that won the Brexit referendum in the UK in 2016. Symbolism yet again.
Regarding Johnson’s Internal Market Bill, the expectation is that he will concede by removing the offending passages in it (i.e. remove the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement), which was likely his plan all along. A copy of Trump’s “create chaos but still get what you want” approach. The expected narrow trade deal will likely be the beginning of an evolving process in EU-UK relations. The UK will likely remain closely aligned with EU rules for another year, but may then seek to diverge from them as the UK economy re-orientates. Expectations remain bearish on the Pound over the medium term. Assuming that a no-deal scenario is indeed avoided and that the EU and UK strike a narrowly focused free trade deal, this will still leave the UK’s terms of trade in a worsened position, which will have consequences on investment, productivity and economic growth for the foreseeable future, although the UK PM will not phrase it in such a way
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Stuart Cowell
Head Market Analyst
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