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Pound-to-Euro Exchange Rate Supported in Wake of Merkel Comments

Merkel Johnson meeting

Above: Angela Merkel, Boris Johnson. Image © Gov.UK

- Sterling to take guidance from Johnson-Macron meeting today

- Germany's Merkel proves constructive to Johnson & Sterling trade

- Expect the Pound to trade around current levels short-term

The GBP/EUR exchange rate is holding a range just above 1.09 in the aftermath of a key meeting between UK Prime Minister Boris Johnson and German Chancellor Angela Merkel.

Following the meeting, 1 GBP buys 1.0940 EUR, the week's high is at 1.0980, and the low is down at 1.0888.

The meeting between the two leaders saw Merkel challenge Johnson to come up with alternatives to the Irish border backstop within 30 days, however markets will remain nervous ahead of a scheduled meeting between Johnson and France's Emmanuel Macron today. Macron is widely expected to take a less compromising approach with his British counterpart and should therefore remind currency traders of the hard road that lies ahead for Sterling.

"The recent recovery in British Pound following UK PM Boris Johnson friendly meeting with German Chancellor Angela Merkel in Berlin on Wednesday is not expected to endure as upcoming meeting with French President Emmanuel Macron should break any glimmer of hope that the EU is willing to find common ground for what concerns the Irish backstop," says Vincent Mivelaz, a market analyst at Swissquote Bank.

Merkel said that the time had come for the UK to put its proposals forward and pledged to “put our all” into solving the impasse.

Johnson welcomed the “blistering” pace of Merkel’s timetable saying he was “glad you have said conversations can now begin”.

He added that the “onus is on us to produce those solutions,” noting his predecessor Theresa May had failed to set out alternatives to the backstop.

Speaking alongside Merkel, Johnson repeated demands that the Irish border backstop must be removed in full for a Brexit deal to be struck between the EU and UK. The backstop - an insurance policy that would guarantee no 'hard' border is ever erected on the island of Ireland - remains the most problematic aspect of the existing Withdrawal Agreement struck between the EU and the UK's previous government of Theresa May.

The EU have repeatedly said the issue is not up for renegotiation, while Johnson maintains it threatens UK sovereignty and must be completely removed for any deal to gain ratification in the UK parliament.

Therefore, any hope for a deal being agreed - which would see the British Pound rally sharply - depends on the two sides striking a fresh compromise.

"It was said we will probably find a solution in two years. But we could also find one in the next 30 days, why not?" said Merkel.

Some have interpreted this to be Merkel 'granting' the UK 30 days to find a solution; this is certainly the interpretation adopted by Johnson who said he would take on the challenge to find a solution despite the short period of time.

“I must say I am very glad listening to you tonight Angela to hear that at least the conversations on that matter can now properly begin. You have set a very blistering timetable of 30 days — if I understood you correctly, I am more than happy with that,” said Johnson.

"UK Prime Minister Boris Johnson met with German Chancellor Angela Merkel in Berlin yesterday, as the clock ticks down to the October 31 Brexit deadline with no deal yet in sight. Merkel granted the UK 30 days to come up with a viable alternative to the Irish backstop, the key sticking point between the two parties at present," says Daniel Marc Richards, MENA Economist with Emirates NBD.

From a currency market perspective, this tells us there remains scope for progress, and therefore would suggest the market believes now is not the time to press Pound Sterling towards fresh lows. Traders will see selling Sterling towards fresh multi-year lows as a risky prospect if there is a chance that agreement can be reached and 'no deal' averted.

However, with risks for such an outcome remaining elevated we believe any Sterling upside will remain strictly limited and would imagine that strength will be sold into.

"A 'no deal' Brexit would mean that border controls between the UK and France would immediately be imposed at the end of October. We are currently placing a low (20%) probability on a 'no deal' Brexit. However, we still expect Brexit uncertainty to continue to weigh on GBP in the near‑term," says Kim Mundy, a foreign exchange strategist with CBA.

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Pound Sterling found support earlier in the week following comments by Merkel that hinted there might be room for movement on the vexing Northern Irish border question.

Further developments on Thursday are appearing supportive of Sterling, with newswires quoting a senior official in Brussels as saying the EU awaits further details from the UK, and that European Council Donald Tusk would be "in listening mode" when he meets Johnson.

The Pound went higher Tuesday after Merkel was quoted as saying the European Union would think about practical solutions to the backstop, an agreed insurance policy for the Irish border that London wants scrapped.

Speaking in Iceland, Merkel said:

"The moment we have a practical arrangement on how to preserve the Good Friday agreement and at the same time define the borders of the (European Union's) internal market, we would not need the backstop anymore. This means we would naturally think about practical solutions. And I've always said that when one has the will to find these solutions, one can do so in a short period of time. The EU is ready to find a solution."

While there was certainly a pop in Sterling on the interpretation that the EU are open to talking about the Northern Irish border, we would suggest gains will be tempered by Merkel's comments that the Withdrawal Agreement itself stays closed.

Macron up next

Emmanuel Macron, Image © European Union.

Foreign exchange markets will be looking to Paris today for further guidance on the trajectory of Brexit, amidst heightened expectations that a meeting between the heads of UK and France will be a frosty one.

UK Prime Minister Boris Johnson is scheduled to meet France's President Emmanuel Macron to discuss issues facing the two countries, but the key topic on the agenda will of course be Brexit.

The outcome of the meeting could well determine trade in the British Pound into the weekend, with the UK currency apparently looking more settled as markets await fresh news that will offer guidance on the course Brexit is taking. The Pound-to-Euro exchange rate looks to be consolidating above 1.09 in the short-term while the Pound-to-Dollar exchange rate is sitting just north of 1.21.

Ahead of today's high-level meeting, Macron indicated he was in little mood to find compromise with his opposite number. The President told the press that he can't see a reason to grant a Brexit delay to the UK unless there were a notable change in the country's political situation, such as an election or referendum.

Furthermore, Macron said on Wednesday that any 'no deal' Brexit would be the fault of the UK.

Notably, Macron said any renegotiation of the existing Brexit Withdrawal Agreement on the terms proposed by Johnson "is not workable".

Expectations for any breakthrough are therefore understandably low.

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