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May & Juncker Meeting Hints at Progress, Pound Sterling Well Supported

Juncker and May

Above: May and Juncker, Brussels, February 20. Image © European Union , 2019 / Source: EC - Audiovisual Service

- Pound Sterling betrays belief Brexit deal will be done

- May confident on getting legal assurances on backstop

- Chancellor Hammond hints next vote on deal could come as soon as next week

Ahead of the weekend, the Pound is well supported with the currency being the best-performing major of the past five days of trading. Gains came in the wake of the latest Brexit developments that saw the British Pound trad above 1.15 against the Euro and 1.30 against the Dollar after UK Prime Minister Theresa May and European Commission President Jean-Claude Juncker met in Brussels to secure a solution to the ongoing Brexit impasse; and both indicated progress was taking place.

"I've underlined the need for us to see legally binding changes to the backstop that ensure it cannot be indefinite," says May following the meeting. "We’re making progress."

Discussions included work on the securing of guarantees that would ensure the Irish backstop clause contained in the Brexit agreement can only ever be temporary. May wants a legal guarantee that the backstop is time-limited, in order to ensure the UK cannot be caught in the EU customs union and single-market indefinitely.

Importantly, discussions on the legal nature of any such guarantee were discussed, there is little chance of the Brexit deal being voted through the UK parliament without legal guarantees being attached.

A joint statement issued following the meeting reads, "the two leaders agreed that talks had been constructive, and they urged their respective teams to continue to explore the options in a positive spirit. They will review progress again in the coming days, seized of the tight timescale and the historic significance of setting the EU and the UK on a path to a deep and unique future partnership."

Nick Gutteridge, Brussels reporter at The Sun quotes a UK Govt spokesman saying the reopening of the Withdrawal Agreement would still be considered the best way forward, however "PM & Juncker agreed work would now focus on guarantees relating to backstop that underline once again its temporary nature & give appropriate legal assurance to both sides."

In short, the two sides appear intent on securing a legal attachment to the Withdrawal Agreement document, in the form of a 'codicil', something Pound Sterling Live has said would happen as far back as December.

"In other words the Government is now effectively admitting defeat on trying to get the EU to reopen the Withdrawal Agreement, even if that remains its ultimate wish. The bullet has finally been bitten. EU will welcome what it‘ll see as a dose of reality. ERG will be hopping mad," says Gutteridge.

However, many commentators point out that a legal assurance is a legal assurance, whether it is in the deal or attached to the deal, therefore resistance to such an outcome should be regarded as petty.

The hope is that whatever legal assurances comes out of these talks will ultimately satisfy most of the opponents who voted down the Brexit deal in the House of Commons. Indeed, we note Attorney General Geoffrey Cox is heavily involved in the current round of negotiations and he will offer a definitive view as to whether any codicil is in fact legally binding.

The UK's most senior minister, Chancellor of the Exchequer, Philip Hammond, says of the talks that there has been significant discussion on alternatives to the Irish backstop, and that a EU guarantee on the backstop could be significant.

Quoted by the Reuters newswire on Thursday, Hammond says there could well be an opportunity for the staging of a "meaningful vote" on the Brexit deal as early as next week as talks have thus far been "good and constructive".

This suggests that we could have news of a new agreement between the EU and UK over coming days, with some sources touting a meeting of EU leaders in Sharm el Sheik in Egypt over the weekend as one to watch.

We know Prime Minister Theresa May will attend this meeting, however, some EU officials have downplayed this venue as being one where any notable breakthrough would occur.

The British Pound retains a broadly positive tone on global foreign exchange markets at the present time, largely on the basis that markets sense progress towards a Brexit deal is ongoing.

The rule-of-thumb to adopt regarding Brexit negotiations is that no news tends to be good news.

As noted by Oliver Wright, Policy Editor at The Times: "No news means good news with Brexit talks... in the short history of Brexit negotiations a good rule of thumb has been that the less you hear the more progress is being made."

Wright adds:

"Brexit chatter has gone suspiciously quiet.

"There are small signs that, in contrast to the rhetoric of two weeks ago when Theresa May visited Brussels for negotiations with the Commission president, Jean-Claude Juncker, significant progress is being made."

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British Pound Hits a Soubry-Shaped Speed Bump

Soubry

Above: Anna Soubry, the most high-profile of Conservative party defectors. Image © Gov.uk.

The Pound-to-Euro exchange rate had dipped below 1.15 midweek on news of domestic political turbulence in the UK after three Conservative party lawmakers quit the party, in the process whittling down the government's majority in parliament.

"Insofar as neither the electorate, parliament nor the EU favour a no deal Brexit it is our view (and that of the market consensus) that a deal will eventually be passed. That said, the odds in favour of a hard Brexit have grown as the March 29 deadline approaches," says Jane Foley, a foreign exchange strategist with Rabobank, commenting following news of the defections.

Importantly, the reduced government majority leaves little wiggle room for May, and further defections could leave the Prime Minister with little room but to resign and call another General Election.

"The defections reduce the government’s working majority in the Commons from 13 to seven, though the defecting MPs have said they will vote with the government on some issues (which probably includes confidence motions). Nonetheless, the risk of a near-term election has risen," says Adam Cole at RBC Capital Markets.

According to betting markets, the risk of an election this year has risen from an already elevated level of 36% to a record 44%.

Probabilities of an election

But, the Pound Likes the Sound of Progress on Brexit

Despite the domestic political intrigue, Pound Sterling traders towards the top end of medium-term ranges against both the Dollar and Euro as the mood-music on Brexit negotiations remains optimistic.

The nerves however proved temporary and the Pound ultimately regained its poise to close the day higher, with traders citing comments from Spain's foreign minister Josep Borrell who says a Brexit accord is "being hammered out".

Borrell

Above: Josep Borrell Fontelles, Image courtesy of Ministro de Asuntos Exteriores. Reproduced under CC licensing conditions.

"I think the accord is being hammered out now, without having to go to Sharm El-Sheikh to do it," Foreign Minister Josep Borrell said in an interview at the ministry’s palace in Madrid.

Borrell says he is still hopeful of a Brexit deal and that the two sides can avoid "causing damage to each other".

The Pound rallied on Tuesday, February 18 on press reports of progress concerning Brexit. It was reported that "a new backstop deal with the EU is now imminent" and that Downing Street and UK negotiators were “pleasantly surprised” at how well talks have progressed with the EU this week, "and there is rapid movement behind scenes."

Talks have this week been held between EU negotiators and Brexit Secretary Stephen Barclay and UK Attorney General Geoffrey Cox.

Cox was due to give a speech around mid-day Tuesday covering the legalities on any changes to the Brexit backstop deal, but the talk was delayed.

This delay signalled to markets that progress was potentially being made, and the Pound embarked on a rally against the Dollar, Euro and other currency majors.

The market is looking for the slightest signs of developments in Brexit, and something as innocuous as a delay in the speech of a key player can be enough to trigger a move.

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