Key Change to EU's Trade Negotiation Mandate Should Underpin Pound Sterling

EU UK trade negotiations

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- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
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Some potentially Sterling-supportive news out of Brussels ahead of the weekend is that the EU's latest draft mandate for EU-UK trade negotiations shows that the EU won't be pushing for 'dynamic-alignment'.

The main change to the draft is that "the envisaged agreement should uphold the common high standards, and corresponding high standards over time".

"The addition of the word "corresponding" is to make clear that the #EU expects both "non-regression" of regulations in the UK and some kind of parallel evolution of EU /UK rules over time — but it does not go as far as requiring full dynamic-alignment," says Jim Brunsden, Financial Times reporter in Brussels.

The issue of dynamic-alignment is key for the talks as it could be where they succeed or fail. Dynamic-alignment is essentially a requirement for the UK to adhere to a certain set of laws and standards, set by the EU, in order to have a free-trade agreement.

The rub for the UK is that following EU rules does not amount to the kind of sovereignty that Brexit promises; therefore the main point of concern for foreign exchange markets when trying to gauge the outlook for Sterling is how the issue of dynamic-alignment plays out.

That the explicit demand for dynamics-alignment is no longer in the agreement should therefore suggest that the EU are giving themselves the kind of space within which to negotiate and not kill talks off.

Of course, we are talking about a draft here, and EU ambassadors will on Monday meet to discuss the text.

"All eyes will be on France to see if it can agree. Otherwise European affairs ministers will need to thrash out a deal on Tuesday," says Brunsden.

Sterling has however not found any bid on the developments and we wonder if we are missing something in the draft, or whether the market is happy to sit on the sidelines for now and wait until negotiations commence and the newsflow offers them something more tangible to get their teeth into.

The Pound-to-Euro exchange rate is quoted at 1.1933 and is 0.60% lower this week.

The Pound-to-Dollar exchange rate is quoted at 1.2956 and while it is up 0.50% on the day, it is down 0.80% on the week.

"The UK and the EU starting positions on any FTA agreement are far apart and the likelihood of negative news flows on the state of negotiations is high during the year. Overall, the GBP will likely be weighed down by all of these factors," says Jacques Keller, Global Bonds Portfolio Manager at Amundi Asset Management.

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