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Pound Boosted as Ireland said to Back May's Customs Plan

Varadkar and impact on exchange rates

Above: Irish Taoiseach Leo Varadkar's government is reportedly welcoming of the U.K.'s latest proposals on trade and the Northern Ireland border. Image © European Council, Reproduced Under CC Licensing

- Reports boost May's chance of securing Brexit deal

- Sterling rally confirms markets confident a deal will be reached

- Pound-to-Euro exchange rate at 10-day high, can go higher

The British Pound pushed fresh multi-day highs against the Euro and recovered back above the psychologically important 1.30 level against the U.S. Dollar thanks to reports Ireland could back U.K. Prime Minister Theresa May's vision for a future E.U.-U.K. trading relationship.

Crucially, the details of May's plan are yet to be revealed but reports out this week say the U.K. are working on proposals for the whole U.K. to participate in a customs union with the E.U.

Michel Barnier, chief E.U. negotiator and other European leaders have already rejected the idea, but a report in the Irish Times says officials in Dublin privately argue it could settle the Border question and open the way to a deal.

Irish government sources quoted by the Irish Times say, "it looks like it would resolve that issue [of the Border]" and "whether Europe accept it or not is another conversation."

Nevertheless, the Irish intervention is being held by markets to be a sign of support for May ahead of a crucial E.U. summit on October 18th.

Foreign exchange markets are responding positively with Sterling sitting atop the G10 leaderboard with a 0.20% advance on the U.S. Dollar and a a 10-day high against the Euro.

"GBP outperformed across the board. Reports that Irish officials plan to back UK Prime Minister Theresa May’s Irish border backstop proposal (to ensure there is no hard border on the island of Ireland) raised hopes that a Brexit deal could be reach at the 18th October EU summit. Essentially, May’s proposal is for the whole of the UK to remain in the customs union until a UK-EU trade deal is finalised," says Elias Haddad, a foreign exchange strategist with CBA.

The prime minister may have more freedom to manoeuvre, now that her ruling Conservative party has concluded its conference.

And, May's officials are planning to rush her Brexit deal through Parliament to stave off a rebellion from her own party, Bloomberg reported on Thursday.

May's team want the final withdrawal agreement ratified by lawmakers within two weeks of signing the terms of the divorce in Brussels, Bloomberg said citing people familiar with the matter.

Under that timetable, members of Parliament would vote on whether to accept or reject the divorce treaty by the beginning of December, sources told Bloomberg.

The news comes in the wake of a well-received Conservative conference speech in which May said she would be seeking a free trade deal with the E.U. which would still allow the country to take a seat at the World Trade Organisation.

May is calculating she has something that can solve the Irish border question and deliver enough autonomy on trade to reflect the spirit of the Brexit vote.

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European Council President Donald Tusk - who will oversee next week's crucial Brexit meeting of European leaders - has meanwhile captured headlines over the past 24 hours maintaining he is willing to strike a free trade deal. 

“From the very beginning, the EU offer has been not just a Canada deal, but a Canada+++ deal – much further-reaching on trade, on internal security, and on foreign policy cooperation,” Tusk said.

The Canadian agreement with the EU is a straightforward free trade deal which the EU has suggested for months could be tailored to UK needs if it insists on retaining its red lines on membership of the customs union and single market.

However, the deal would not remove the need for border controls and so would have to complement a Northern Ireland backstop.

And it is this backstop plan that May won't agree to.

 

GBP/EUR at 10 Day Highs, Can Push Further

The British Pound has risen to a new 10-day high on the back of Theresa May's speech to the Conservative party conference in which markets welcomed the fact nothing new was delivered on the subject of Brexit; traders were simply looking for an uneventful address that reinforces a belief that a Brexit deal will be delivered by November.

In the market's calculation, any fresh change in direction signalled by May would have risked the likelihood of a positive outcome. May is intent on sticking with her 'free trade' plan (a rebranding of the 'Chequers plan') and markets believe this is something the E.U. and U.K. can reach agreement on.

As such, the GBP/EUR exchange rate remains a constructive tone on the charts and should we see any further Italian-inspired weakness in the Euro then further near-term gains by Pound Sterling remain possible.

Pound to Euro exchange rate constructive near-term

Above: The daily chart for GBP/EUR shows an uptrend remains in place since August. Image (C) Pound Sterling Live, TradingCentral.

At one point on Thursday the Pound was the best performing major currency:

Pound best performer

Above: In the wake of Theresa May's conference address the Pound was the best performing G10 currency. Image (C) Pound Sterling Live.

Near-term momentum looks positive and with the Conservative party conference having passed we don't see the potential for any major domestic political uncertainty. The conference went without any major hiccup and Theresa May's strong performance in her closing address suggests her grip on the leadership is not under threat, anytime in the near-future at least.  

This provides some sense of stability for markets, and is therefore GBP-positive on the margin.

Robin Wilkin, a strategist with Lloyds Bank says momentum has turned up, suggesting further pressure on the 1.1312/1.1325 resistance region. A break sees next resistance in the 1.1358-1.1389 region, with little standing in the way of Sterling above here until 1.1461.

A decline back through 1.1210 is needed to alleviate the current bullish bias says the analyst.

Regarding Brexit, all eyes now turn back to Europe and a meeting of European leaders at a dinner on October 17 when they review the state of negotiations with the UK.

"In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal," European Council President Donald Tusk said at the Salzburg informal summit.

October was at one point the deadline for talks, but a new date in November was announced in Salzburg. But, as Tusk points out, the time for results are upon us. Expect market nerves to remain piqued over the next week.

"Brexit remains the key driver for the GBP and uncertainty related to the outcome is likely to keep the GBP volatile and undervalued in the coming months," says Mikael Olai Milhøj, a foreign exchange strategist with Danske Bank.

According to consensus forecasts the Pound is well above where it is expected to be in three and six month timeframes. For the exact numbers and key investment bank targets Horizon Currency Ltd have produced a special download report.

 

Euro Nervous as Italy Remains in Focus

For the GBP/EUR's near-term outlook, much will depend on developments in Italy and the EUR/USD exchange rate.

On the former, Italy's final 2019 Financial and Economic Document (DEF) is still to be released which creates the potential for further headlines on the matter to emerge and potentially move markets.

Markets are nervous that the Italian government will maintain a confrontational approach with Brussels over their desire to expand the country's debt pile, but a recent move by the government to reign in deficit ambitions for 2020 and 2021 has stabilised the situation somewhat.

Regarding the EUR/USD, we note the exchange rate has now broken below 1.15 which suggests a technical deterioration in the short-term.

And deterioration here could also be reflected in the EUR/GBP cross and could therefore be positive for Sterling.

"EUR/USD is on the defensive and has eroded the 1.1510/08 key support. This de stabilises the chart and allows for losses to 1.1411, the 78.6% retracement. This is seen as the last defence for the 1.1330 200 week ma and the 1.1301 recent low. We note that the Elliott wave count is still labelling this as corrective only and ideally we will see 1.1411 hold and provoke reversal," says Karen Jones, a technical analyst with Commerzbank.

Keep an eye on the U.S. Dollar which continues to outperform rivals thanks to rising U.S. Treasury yields; should the Dollar remain in charge expect the EUR/USD to struggle further.

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