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Pound Sterling Live: Barnier, Varadkar Comments on Irish Border Triggers Recovery

Barnier

Michel Barnier, image (C) European Union

- Sterling puts in gains after days of losses

- Varadkar, Barnier hint at potential for movement on Irish border

- Parliament pass fresh measure to prevent 'no deal', underpins Sterling recovery

- News that ECB to look at inflation target sends Euro lower in early London afternoon

Finally, some relief for the British Pound which is rallying against the Euro, Dollar and a host of other currencies as some potentially positive comments from the European Union's Chief Brexit negotiator and Ireland's Prime Minister come through.

Newswires are reporting that Barnier is ready to work on alternative arrangements for the Irish border; we believe the quotes are taken from an interview given by Barnier to BBC Radio 4.

The issue of the Northern Irish border has long been a stumbling bloc in both the EU and UK reaching agreement on a Brexit deal, any suggestions of a substantial shift in position by the EU will therefore be seen by some market participants as a potential game-changer.

"Barnier says open to Alternative Irish Border plan. Sequence of events post Tory PM being elected on 22 July points to renewed UK-EU talks and optimism for a Brexit deal. Oversold GBPUSD has asymmetric headline risks (more sensitive to positive over negative). Bullish hopes," says Viraj Patel, a foreign exchange strategist with Arkera.

GBP to USD exchange rate

A spike was detected in GBP/USD and other Sterling pairs when Barnier's Irish border comments hit the newswires.

Barnier's comments were soon followed up by comments from Ireland's Prime Minister Leo Varadkar.

Varadkar has said there are a few ways to avoid a hard border and if there are proposals that genuinely finds a solution, he will listen to them.

However, if there are no meaningful suggestions, "we cannot move away from backstop," Varadkar told broadcaster RTE

He adds that if there is a no-deal Brexit outcome, it will be the choice of the UK government.

The tone from Varadkar and Barnier - two central figures from the EU side - suggest there is some willingness for movement on the key issue of the backstop.

Therefore, the prospect of a negotiated settlement remains alive and there is a risk that markets feel they have oversold the Pound as a result.

The developments on the EU side come after Barnier was told last week by the UK's Brexit Secretary Stephen Barclay that the current Brexit deal - that contained the Irish border backstop - is effectively dead.

Pound Sterling meanwhile fell to a new multi-year low against the Dollar and multi-month low against the Euro after both candidates vying to replace Prime Minister Theresa May pledged in a debate to abandon the backstop in its entirety.

We would expect some sharp words on the matter to be offered during the campaign, but would imagine the winner would soften their position when they get the keys to Number 10.

The Pound-to-Euro exchange rate is currently quoted at 1.11, the current week's low is at 1.1047.

The Pound-to-Dollar exchange rate is currently quoted at 1.2468, the week's low is at 1.2382.

That Sterling is recovering has not surprised a number of analysts who have been suggesting over recent days that the sell-off was getting old and a recovery was due.

"GBP is in the “value zone” and all the negatives of Hard Brexit/Boris risks should be well known to folks for the time being," says Jordan Rochester, foreign exchange strategist with Nomura in London. "For now you need fresh negative news to drive GBP lower with the state of short positioning."

"Any softening in language – perhaps soon after Boris formally succeeds May – could be the reminder to the market that the that we’re not yet at game over for the Pound and suddenly these historically low levels will look a very attractive consideration,” says John Goldie, FX Dealer at Argentex Group PLC.

Meanwhile, Parliament today voted on a cross-party amendment designed to stop a Boris Johnson Government suspending parliament in order to allow Brexit to occur on October 31 if no deal is in place.

The Government was defeated by a majority of 41 in the Commons, thanks to a rebellion by 17 Conservative rebels and numerous abstentions.

The move makes attaining a 'no deal' Brexit by a Government determined to deliver Brexit at all costs come October 31 all the more difficult.

Sterling has shown it tends to find support when the odds of a 'no deal' fade, on balance this move is therefore supportive of the currency's current short-term recovery.

"The upside seen in the pound was intensified by the prospect of a lessened chance of a no-deal Brexit, after MPs voted for a proposal which will make it difficult for the next PM to bypass Parliament in a bid to enact a no-deal Brexit in October. The trajectory of the pound has been closely tied to the chances of a no-deal Brexit, and thus today’s gains prove markets see this as a key step in staving such an event," says Joshua Mahony, Senior Market Analyst at IG.

While Sterling is seen rebounding, the longevity of the recovery is questionable and there is a chance markets will look to sell into any strength.

"Looking ahead, we remain highly sceptical that any GBP rally will prove sustainable and expect pressure on GBP to keep mounting," says Chris Turner, Global Head of Strategy at ING Bank.

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Pound Recovery vs. Euro Extends on ECB Inflation Remarks

The Pound extended its recovery to above the 1.11 mark against the Euro in late London morning trade on Thursday, 18 July on news that the European Central Bank could revamp its policy objectives on inflation.

The ECB is currently tasked with targeting inflation 'below, but close to, 2%', but reports coming out this morning suggests this will change, and markets were quick to bet that any change would be one that is negative for the Eurozone's single-currency.

Bloomberg News reports that ECB staff have been tasked to begin studying a potential revamp of their inflation goal, citing officials familiar with the matter.

"Well if you're going to throw the monetary easing kitchen sink at trying to get inflation in the Eurozone - it makes perfect sense to increase the target that you've failed to deliver on in the past 10 years," says Viraj Patel, an analyst with Arkera, eyeing a sudden drop in value in the Euro in response to the developments.

The news suggests the ECB could well raise their inflation target, and the reaction by the Euro suggests markets believe a case is being made for the ECB to boost its monetary stimulus yet further.

The reaction by the Pound-to-Euro exchange rate to the news suggests markets are taking the news seriously:
ECB news

The Eurozone has for years struggled with underwhelming inflation, and this has prompted the ECB to pump out money via its quantitative easing programme and cut interest rates to record lows.

The theory goes that by making more money available to consumers and businesses, the economy will expand and inflation will grow too.

However, the side-effect of this stimulus is a weaker Euro: U.S. President Donald Trump said earlier this month that the ECB is artificially lowering the value of its currency, which is unfair.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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