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The Pound Awaits Cox-Barnier Meeting

 Cox

Above: Geoffrey Cox, the Attorney General. File Photo. Image © Pound Sterling Live, Parliament TV

- Sterling in strong start to new week vs. Euro, flatter vs. Dollar

- Cox and Barclay due in Brussels Tuesday

- Markets mull conflicting reports as to what it is UK negoatiators are trying to achieve

Focus for Pound Sterlingon Tuesday, March 05 is the meeting of EU negotiator Michel Barnier and UK Attorney General Geoffrey Cox.

The two will be meeting to forge progress on negotiations to secure changes to the Irish backstop clause in the Brexit Withdrawal Agreement.

With a significant deadline looming in the form of the March 12 Brexit vote, we would expect real news on the state of negotiations to start flowing through which could in turn have a significant bearing on the value of the Pound. The Pound has enudred a relatively decent start to the new week and is seen trading back above 1.16 against the Euro but is just below 1.32 against the U.S. Dollar.

"Attorney General Geoffrey Cox is spending most of his time in talks with EU negotiators and his verdict will be critical to convincing MPs to support PM May's plan. Should that happening in the early part of this week, we cannot exclude the possibility that the "meaningful vote" is brought before parliament before the March 12 deadline," says Nikolaos Sgouropoulos with Barclays. "Further market-friendly political developments will likely further boost GBP."

Cox has become the key figure in the current round of negotiations, as he is trusted by all sides of the Brexit debate to give credible legal advice on the Brexit deal's Northern Irish backstop clause. His legal assessment of any changes to the backstop clause are widely expected to influence whether parliamentarians vote to accept the Brexit deal which must come before them again before March 12.

Sterling has rallied through 2019 on a combination of expectations that Prime Minister Theresa May's Brexit deal will be accepted by parliament on a second vote and a view that a 'no deal' Brexit has diminished in likelihood, even in the event the deal is rejected a second time. At the time of writing, Sterling trades close to multi-month highs against both the Dollar and Euro with the Pound-to-Euro exchange rate quoted at 1.1644 and the Pound-to-Dollar exchange rate is quoted at 1.3201. We believe there will be notable gains for these two exchange rates should May's Brexit deal be accepted by parliament. 

Therefore, market attention will be on Cox and whether he is able to give Brexiteers the assurances they are looking for.

Ahead of his Tuesday meeting with EU negotiators, Cox has denied weekend reports carried in The Telegraph that he all but accepts the UK cannot deliver the changes to the Irish backstop many MPs say are required to secure their vote.

"The DT reporting of the last 24 hours consists of misunderstood fag ends dressed up as facts," says Cox's office in response to The Telegraph report. "Some of it is accurate, much more of it isn’t and what is not is far more significant than what is. Complex and detailed negotiations cannot be conducted in public."

Reports had suggested Cox has abandoned attempts to secure a time-limit or unilateral exit mechanism for the Irish backstop, two key changes demanded by UK lawmakers opposed to Prime Minister May's Brexit deal if they are to switch and back an amended deal.

Ministerial sources told The Telegraph that Cox's aims, that represent central demands of Brexiteers, are considered too "blunt" and have been rejected by the European Union.

The backstop clause in the Brexit deal aims to avoid the establishment of a trading border between Ireland and Northern Ireland, however in its current form it could leave the UK perpetually locked into the EU's customs union and single market and has attracted fierce opposition from UK politicians as a result.

According to the Telegraph, Cox is now said to be seeking an enhanced "arbitration mechanism" that allows Britain or the European Union to provide formal notice that the backstop should come to an end. But, demands for an "independent" arbitration panel by UK negotiators are being resisted by the EU who want the jurisdiction of the European Court of Justice to govern the backstop.

However, in response to the reports, Communities Secretary James Brokenshire tells Reuters on Monday Cox is seeking legally binding changes to the Irish border backstop and the Brexit negotiations are at a critical stage, "the attorney general continues with his work to ensure we get legally-binding changes to ensure that we are not locked in the backstop."

"That is fundamentally what this issue is about - ensuring that we are not trapped in this backstop arrangement which has caused so much concern, so much anxiety amongst my colleagues and MPs across the House," says Brokenshire. "The negotiations are at a critical and sensitive point. People just need to have this little bit of patience to see how this now comes forward."

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Softening Opposition Aiding Sterling, but Look for a Pause in the Rally this Week

Many currency market commentators are saying the Pound is rallying at the start of the new week because opposition to May's Brexit deal amongst Brexiteers is softening; a theme we first reported last week when Jacob Rees-Mogg said he he was no longer insisting that the contentious Irish backstop be scrapped as a condition for his support for May’s deal, instead he and other opponents are prepared to consider other legal fixes to ensure the backstop did not become permanent.

Rees-Mogg is a figurehead amongst a group of Conservative party Brexit-supporting lawmakers who rejected British Prime Minister Theresa May's Brexit deal in January. Reports out over the weekend suggest this grouping have now spelled out the changes they want to see made to the deal in return for their support.

The Sunday Times said a group including former Brexit minister Dominic Raab and Nigel Dodds, the deputy leader of the Northern Irish party which props up May's minority government, had drawn up the tests by which they would assess any changes.

"The mechanism has got to be legally binding, so effectively treaty-level change," one of the group, Conservative lawmaker Michael Tomlinson, said in an interview with the newspaper.

"The second part is the language. It can't be a reinterpretation of the withdrawal agreement or a re-emphasis; it's got to be really clear language as to where we are going ... the third requirement is a clear exit route."

While a further softening in stance by opponents to the Brexit deal is positive for Sterling in that it suggests a deal can pass through parliament at some point this month, it will all come to nought if reports that Cox will be unable to deliver on any of the Brexiteer requests are true.

Concerning the Pound's outlook from here, Jake Trask, FX Research Director at currency brokers OFX, says "positivity could be negated during a key week of events."

The British Pound is 2019's top-performing currency as foreign exchange traders have steadily reduced the prospect of a 'no deal' Brexit occurring on March 29. "With Theresa May offering MPs the chance to vote on a no-deal Brexit, the pound has rallied against the US dollar over the past few days, pushing up to its highest level since July last year and riding on the growing sense of optimism that a cliff-edge departure will be avoided," says Trask.

Trask says should 'no deal' be effectively eliminated by a deal being passed by parliament in March, "we can expect even further gains for the Pound against its trading peers".

The vote on the Brexit deal is expected to occur by March 12 at the latest, however the BBC's Laura Kuenssberg had reported rumours that such a vote could be sprung as early as the first week of March.

This is yet to be confirmed as it is believed the UK is still attempting to secure concessions from the EU that would make the deal more palatable to UK lawmakers.

If the deal is rejected, there will be a further vote the following day to determine whether a 'no deal' departure will be ruled out, and then on March 14, a final vote on a potential extension of Article 50 to allow more time for a deal to be agreed.

The Pound rallied to its highest level in two years this week after May announced the votes to parliament and a separate report suggests the EU would only consider extending an extension of up to two-years if requested by the UK.

“Should the Prime Minister’s plan get through the Commons, we can expect a strong rally in the Pound as the Brexit uncertainty that has weighed on UK businesses is lifted," says Trask. "On the other hand, if it is rejected, and MPs vote in favour of a no-deal Brexit, we expect Sterling to collapse in a drop akin to that seen the day after the Referendum result in 2016".

Trask says the most likely outcome is that should May's deal not pass, and a 'no deal' is then voted against, it is expected that MPs will request an extension of Article 50, and "the Pound will appreciate modestly.”

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