Pound Hits Multi-Week Highs as Ministers are Readied for Imminent Sign-off of Brexit Deal

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© European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus.

- Deal possible by end of week: BBC's Kuenssberg

- Raab says its "thumbs up" following morning Cabinet meeting

- But we are wary of disappointments in current optimistic atmoshphere

Pound Sterling traded at a five-month high against the Euro Tuesday as markets believe a deal covering terms of the U.K.'s withdrawal from the E.U. is close to being reached.

A key meeting of the U.K. Cabinet delivered fresh speculation that the E.U. and U.K. are ready to move on a Brexit deal. The BBC's Laura Kuenssberg says ministers were told to "be ready for another Cabinet meeting, maybe even at end of this week, because there might be enough movement by then to push button on a deal."

Sterling was bid on the news.

The currency was earlier supported after U.K. Brexit Secretary Dominic Raab was was seen by reporters leaving the key Cabinet meeting striking an optimistic tone, saying it was "thumbs up".

Yes, we are at the stage in the Pound-Brexit lifecycle where a thumbs-up from a cabinet minister can influence the Pound.

"U.K. Brexit minister Raab leaves meeting and gives a 'thumbs up' - GBP gets a bump across the board. For the past few days, Raab had been aiming for a provision on the Irish backstop which could help pave the way to a Brexit deal," says Christopher Vecchio, an analyst at DailyFX.

It is understood ministers discussed the mechanism for governing the backstop and who should decide when it no longer applied; it has been reported Raab would like the U.K. to walk away from a deal unilateraly, something fiercly opposed by the Irish Republic who warned they would yield a veto on such an outcome.

"Geoffrey Cox, the Attorney General, said there as a spectrum of what was possible for mechanism for escaping the backstop - ie not being trapped in neither in nor out limbo for ever - ministers say he softened his position from last week which has made a difference," says Kuenssberg.

There has been talk of a third-party being called upon if one party wished to end any 'backstop relationship'; a potential compromise to both sides that could allow talks to progress to agreement.

Sterling has been quite responsive to media speculation of late and we are therefore wary of reading too much into these moves.

The Pound was quoted 0.16% higher at 1.3081 against the U.S. Dollar in the wake of the Raab thumbs-up, a multi-week high, while the Pound-to-Euro exchange rate was at a five-month high of 1.1461.

"Investors remain under-weight Sterling even as Brexit talks are now gaining positive traction. Add to that more political stability in the U.K. as PM May consolidates her leadership and a potential Brexit deal adding to a more hawkish bias from the BoE MPC, conviction may now be turning towards further gains in Sterling across the board," say Citi in a new note covering Sterling's outlook. 

We can meanwhile report that consensus estimates for GBP/USD have been raised for the 3, 6 and 12 month timelines, likely in line with improved sentiment concerning a deal. We recommend downloading the November exchange rate forecast report from Horizon Currency to see where over 50 of the world's leading investment banks and financial institutions are expecting GBP/USD to trade through 2019.

Prime Minister Theresa May called a Cabinet meeting Tuesday in what pundits say is a last ditch attempt at persuading colleagues to back a plan that could ultimately see all of the U.K. remaining inside the E.U. customs union, with all that would entail, in the event a Brexit-trade deal cannot eventually be reached. 

Brexit-backing MPs say the plan, referred to by officials as a "backstop" proposal for managing the Northern Irish border in the event a trade deal can't be reached, would leave the U.K. a colony because the country would be subject to E.U. laws and regulations but without any say over them.

Northern Irish MPs say it would mean a de-facto annexation of the province into the E.U. after Brexit because, despite some minor tweaks to the wording of the backstop, it would still treat Northern Ireland separately to the rest of the U.K. 

Both Brexit-supporting MPs on the British mainland and Northern Irish represenatives have threatened to vote down in parliament any deal struck by May that separates Irish province from Great Britain or that leaves the U.K. within the EU's legislative orbit for an indefinite period of time.


Has the Market Got its Wires Crossed?

Markets appear to have taken the thumbs up from Brexit Secretary Raab as suggesting the cabinet may have reached a unified position that enables negotiators from both sides of the English Channel to claim they have reached a deal covering terms of the U.K.'s withdrawal from the bloc. 

This would lessen the risk of the U.K. leaving the E.U. on March 29, 2019 without a so-called transition deal and any hope of coming to an agreement on the future trading relationship at a later date.

Most economists say this would be bad for both the U.K. and E.U. economies. 

However, the market may have either overlooked or simply just dismissed an earlier report from The Sun that suggested Brexit Secretary Dominic Raab and Foreign Secretary Jeremy Hunt intended to use Tuesday's meeting to pressure Theresa May into "staring down" the E.U. over its insistence that any backstop be indefinite.

If this was correct and Brexit Secretary Dominic Raab left the cabinet meeting smiling then a deal covering terms of the U.K.'s withdrawal from the E.U. may be a lot further away than the market is currently giving it credit for, suggesting the Pound could be vulnerable to fresh losses once clarity emerges.

"Until there is unequivocal confirmation that that the UK will avoid a hard Brexit next year, the outlook for the Pound will remain decidedly grey," says Jane Foley, a foreign exchange strategist with Rabobank in London.

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