Above: The principal Brexit negotiators Raab and Barnier are seen to be leading both sides closer to a deal. Image © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus
- Reports a Brexit deal could come as early as Monday
- But stay cautious, the E.U. likes to negotiate right up to deadlines
- PIMCO see Sterling rising 5-10% if 'no deal' risks put to bed
- Pound-to-Euro exchange rate @ 1.1452, Pound-to-Dollar rate @ 1.3169
Pound Sterling is hovering near multi-day highs against the Dollar and multi-week highs against the Euro as markets continue to price in the prospect of a Brexit Withdrawal Agreement being agreed in coming days.
The U.K. and the E.U. could agree the terms of their Brexit divorce by as early as Monday reports the Dow Jones newswire, citing unidentified diplomats who reckon the announcement of the deal will preceed a meeting of E.U. leaders on October 17.
Dow Jones report both parties have narrowed their differences around the Irish border, but some differences remained.
Luara Kuenssberg, Politics Editor at the BBC, says the "really important movement" on Brexit negotiations "is between officials behind closed doors this week, shuttling back and forwards btw Brussels and Westminster."
If the opposing templates between the two sides can be made to fit then, "it is likely Raab will appear alongside Barnier in Brussels on Monday and draft conclusions are signed off by foreign ministers in Luxembourg on the same day," adds Kuenssberg.
However, reports out Thursday suggest the E.U.'s General Affairs Council - the meeting of foreign ministers - is set to meet on Friday and will consider the Withdrawal Agreement and a Draft Joint Political Declaration. This is proof of an agreement being in existence.
The signing of the draft conclusions will come ahead of a key Cabinet meeting on Tuesday and then E.U. leaders will pore over the details on Wednesday night.
"GBP once again is being buoyed by expectations that some kind of Brexit withdrawal deal can be struck before the October 17th European Council working dinner on Brexit. We’ve been here before, but this GBP move might have a little further to run," says Christopher Turner, a foreign exchange analyst with ING Bank N.V.
Turner's suggestion that Sterling has further to run is echoed elsewhere in the analyst community, "irrespective of whether recent Sterling gains here prove part of a broader/ongoing range - as studies indeed suggest is likely the case - further strength is favoured in coming days," says Trevor Charsley, a FX Risk Management specialist with brokerage AFEX in London.
Optimism is certainly running high ahead of a October 17 meeting of E.U. leaders that will discuss the current state of Brexit negotiations with both sides of the table saying they expect the lion's share of negotiations to be completed.
"Brexit optimism improved further and EUR/GBP continued lower amid news
reports speculating that the Brexit deal could be settled on Monday. As such, the bearish break below the 200-day moving average last Friday implies that EUR/GBP could see
continued downside pressure from a technical point of view in the short-term," says Christin Tuxen, Chief Analyst with Danske Bank in Copenhagen.
5-10% Gains on a 'No Deal' Being Avoided
The relief of a 'no deal' Brexit being avoided should allow Sterling to recover from underpriced levels and rise between 5% and 10% according to Mike Amey, the head of Sterling portfolios at PIMCO, the largest bond fund in the world.
The E.U. and U.K. will more likely than not avert a disorderly Brexit, and foreign exchange markets are therefore "too pessimistic" on Sterling which continues to trade near crisis levels, as a result, the Pound is underpriced says the fund manager.
"Our base case is there will be some sort of co-operative solution," the Pimco manager told Reuters. "We think both sides can achieve their political ambitions without creating a disruptive economic environment."
There is a possible opportunity to trade the Pound higher on October 17-18 when a crunch E.U. summit in Brussels is expected to yield material signs of progress in Brexit negotiations.
The expectation is that the outcome of the summit will be supportive for Sterling and the currency pushes higher, rising up to a target at 1.33 against the U.S. Dollar, according to analysts.
The E.U. summit is followed by a speech from Bank of England Governor Mark Carney in New York which could be an additional catalyst for gains in Sterling.
Longer-term, the delivery of a Withdrawal Agreement between the U.K. and E.U. would allow Sterling to rise to faire valuations.
Amey's predictions of a 5-10% appreciation would translate into GBP/USD rising to between 1.3750 and 1.4300, and the Pound-to-Euro exchange rate rising to between 1.1800 and 1.2300.
Consensus estimates from the polling of nearly 50 of the world's largest investment banks suggest the Pound is to end the year well below Amey's estimates according to report from money transfer specialists Horizon Currency which includes forecasts from the likes of HSBC, Barclays, Goldman Sachs and Citi. The GBP/USD consensus forecast can be downloaded here, the GBP/EUR consensus forecast can be downloaded here.
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Curb Your Enthusiasm
However, we would caution against getting carried away by newswire reports of an imminent deal.
Adam Fleming, the Brussels Reporter for BBC News, meanwhile substantial progress must be achieved between the two sides if progress is to be made next week.
Danuta Huebner, the Chair of the European Parliament's Committee on Constitutional Affairs and a member of the Parliament's Brexit Steering Group, tells Fleming the probability of 'no deal' has "reduced slightly", adding, "Michel Barnier would have to report "decisive progress" to leaders next Weds for them to agree a November summit to approve the deal".
And, Northern Ireland’s Democratic Unionist party, which props up Theresa May’s minority government, has threatened to vote against this month’s Budget if the U.K. and E.U. breach its “red lines” when agreeing to a customs backstop.
The DUP said any post-Brexit customs or regulatory border in the Irish Sea would be unacceptable and that it would scupper the October 29 Budget in retaliation, possibly bringing down the prime minister.
There are signals the U.K. is preparing to offer concessions to the E.U. that would see extra regulatory checks between Northern Ireland and mainland Britain, though no tariffs or customs barriers.
The nature of E.U. negotiations suggest the bloc will always push the other side right up until the deadline, and with the very latest possible deadline being in December, there could well be reason to stay cautious.
According to Danske's Tuxen, as the ‘end game’ to Brexit talks draws closer, the more digital the event becomes.
"We expect EUR/GBP to break lower once a no-deal scenario can be ruled out. However, while the timing is not impossible, we are still sceptical that the EU and UK will reach a deal at the EU Summit on 18 October. Hence, we see risk is tilted towards a round of negative news
and thus a reversal of the latest Brexit optimism," says Tuxen.
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