Talks on trade and transition, as well as the prospect of a "soft Brexit", could continue to support the Pound Friday.
The Pound has surged against the Australian Dollar in overnight trading after Prime Minister Theresa May reached an agreement with the European Commission that should enable Brexit negotiations to progress onto the subjects of trade and transition following the European Council summit of December 14.
Sterling rose to its highest level against the Aussie Dollar since July 01, 2016, in response to the agreement's announcement, trading at 1.7950. It has also gained sharply over all of its other G10 rivals during the overnight session and into London's Friday.
“At their summit next week the EU heads of government are thus likely to give the go-ahead for the next round of the negotiations. Sterling is likely to benefit from this news today,” says Thu Lan Nguyen, an analyst at Commerzbank.
The agreement, and recent difficulties, have centred on the questions of European Union citizens’ rights after Brexit, the Northern Irish border and the “financial settlement”. Negotiators in Brussels had made demands across all three areas and refused to discuss future ties without agreement to those ends.
Above: GBP/AUD rate at weekly intervals. Captures referendum reaction and 2017 trading.
December 14 is a pivotal point for the Pound. London’s negotiators are hoping the European Council will sign off on the progression of talks, from the subject of “divorce”, to the topics of trade and transition. Moving talks along is said to be key if London is to avoid an early exodus of financial services firms from the City.
“With sufficient progress made in the divorce negotiations the UK and the EU will move onto trade and transitional talks at the upcoming 14 December EU Summit,” says Kallum Pickering, a UK economist at Berenberg.
The agreement struck by Prime Minister Theresa May will enshrine would could be described as preferential rights, for EU citizens, into UK law. It will also provide the European Court of Justice with a role in determining those rights after Brexit.
These may be seen as highly contentious concessions by members of the PM’s own party and Brexit-supporters across the political divide.
“Now that firms and households will likely expect that a soft Brexit has become more likely, the global upturn can now begin to rub off on the UK more next year,” says Pickering.
Friday’s agreement comes after an earlier concession by Prime Minister Theresa May, where she agreed to pay a “divorce bill”.
This could cost the tax-payer €100 billion in gross terms and around €50 billion after adjustments are made. It forms part of the broader agreement finalised on Friday.
“The next contentious issue on the Brexit question is no doubt not far off. It is therefore too early for the GBP bulls to breathe a sigh of relief,” says Commerzbank’s Nguyen.
Commerzbank’s Nguyen highlights the risks to the Pound that are inherent in the Brexit talks.
With European negotiators having played hardball successfully with Prime Minister Theresa May, the prospect of similar tactics being deployed over other issues in future cannot be ruled out.
With each further concession, pressure on Prime Minister Theresa May from within her own party could grow, placing the stability of the government at renewed risk.
“Our Brexit base case therefore remains unchanged. We expect the UK to accept by late 2018 a transition deal (possibly similar to the Norway deal minus some financial market privileges) for 2 or 3 years (80% probability)," says Berenberg’s Pickering.
"Since it will be difficult to change such an arrangement very much over time, major parts of this arrangement could solidify into the final terms for post-Brexit trade between the UK and the EU.”
The Pound-to-Australian-Dollar rate was quoted at 1.7978 during early trading in London Friday.
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