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Pound Sterling: Barnier Confirms "Constructive" Start to Trade Talks, GBP Holds Advance against Euro and Dollar

- 1st round of talks end in constructive manner
- GBP recovering recent declines
- Barnier warns "many serious differences" remain

Barnier

Above: File image of a Michel Barnier press briefing © European Union, 2018 /Source: EC - Audiovisual Service / Photo: Lukasz Kobus

- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
- Bank transfer rates (indicative): GBP/EUR: 1.0520-1.0596 | GBP/USD: 1.1537-1.1620
- Specialist money transfer rates (indicative): GBP/EUR 1.0650-1.0701 | GBP/USD: 1.1650-1.1745 >> More details

The British Pound found itself as one of the better performing major currencies on Thursday, March 05 amidst an ongoing recovery in global stock markets, signs that the Bank of England won't rush into an interest rate cut and constructive comments from the EU following the first round of EU-UK trade negotiations.

The EU's Chief Brexit negotiator Michel Barnier delivered a press conference and confirmed talks had started in a "very constructive" manner.

"This first round was an opportunity to exchange, compare and clarify our respective positions. There are points of convergence and divergence, which is totally normal for a first round of negotiations,” said Barnier.

That there have been no early bust-ups between the two sides bodes well for the immediate set of negotiations and should provide the British Pound with some breathing space within which to recover some of the sizeable losses recorded at the end of February.

"This negotiation is all about building or rebuilding an ambitious partnership with this great country which after Brexit will remain a neighbour, friend and ally But we do have to build everything on a different legal basis because of Brexit," said Barnier.

Barnier says the UK has "confirmed" it will not renege on the Northern Ireland protocol.

He said the UK's chief negotiator David Frost, "confirmed the UK will respect all its legal undertakings. This is a condition for the trust we need now to build our future partnership on a good basis."

Following the conference the Pound-to-Dollar exchange rate was seen holding its gains and was quoted at 1.2926, a 0.42% advance on the previous day's close. The Pound-to-Euro exchange rate was quoted at 1.1544, down slightly on the day but we note the Euro is currently the currency of the moment and there is little standing in the way of its stellar run.

We entered Thursday noting the press conference as a potentially important event for Sterling, all commentary out of Brussels this week on the status of trade talks had been surprisingly constructive and we were therefore wary of any market complacency.

We were concerned that should Barnier offer up any negative surprises the more constructive tone to Sterling we have witnessed over the past 24 hours could be questioned.

Barnier on Tuesday said trade talks had started on the right foot, "the negotiations are going well," Barnier told reporters.

While talks have started on a constructive footing we are wary that the early stages are most likely dealing with the 'low hanging fruit' and we would expect the more contestable points of the negotiations to be covered towards the end of the talks. This is a point at which Sterling might well become more reactive to developments in Brussels and London.

Indeed, Barnier noted in his address to the press that "many serious differences" exited. Some points of contention are, unsurprisingly, the UK's unwillingness to follow EU rules in order to maintain a level playing field.

Furthermore, the "UK has made it clear it does not wish to commit formally to continue to apply the European convention of human rights," said Barnier.

"Another key theme driving sterling is the UK-EU trade talks. The EU wants access to UK fishing waters, the UK wants a Canada-style trade deal, both of which are being denied by the other. An important point to note is that a Canada-style deal doesn’t even cover UK financial services, part of the services sector which contributes over 80% to UK GDP. Furthermore, an Australian-style deal is said to be the same as a no-trade-deal Brexit, which could potentially wipe 10% off sterling’s current value," says George Vessey, Currency Strategist at Western Union.

Pound finding support

The Pound still has some way to go before it overturns the sharp declines witnessed in the final days of February, a decline that coincided with an outbreak of concern over the economic impact the coronavirus will deliver.

Sterling has shown itself to be increasingly correlated to global investor sentiment, falling when stock markets are in the red and rising when they recover.

We are currently seeing a little more optimism in markets as investors respond to a series of global central bank interest rate cuts and the passing of a multi-billion dollar support package in the U.S. senate overnight.

Further support for Sterling has meanwhile been sourced from a reduction in market expectations for an interest rate cut to be delivered by the Bank of England this month.

Expectations for a rate cut by the March 26 meeting now sit at around 50/50 according to money markets, after the incoming Governor Andrew Bailey told Parliament's Treasury Select Committee that he is waiting for more evidence on the impact of the coronavirus outbreak before voting to cut interest rates.

"What we need is frankly more evidence than we have at the moment as to exactly how this is feeding through," said Bailey.

The market pared back expectations for a rate cut as a result, at the start of the week expectations sat at around 65% for a cut, but they are now at 50%. "That was a wild day in interest rate markets. Mid-morning, investors were pricing-in a near-certainty of a 25bp emergency Bank Rate cut in the next wk. That's now seen as a 50:50 chance, following Bailey's comment that he wants "more evidence" of the virus impact before cutting," says Samuel Tombs, UK Economist at Pantheon Macroeconomics.

The Pound has proven to be particularly sensitive to shifting expectations for a rate cut at the Bank of England; in January the currency fell as markets increased bets the Bank would cut rates due to softening economic data. However, the Bank opted to keep an eye on the data, a decision that was justified by a subsequent uptick in economic activity.

If expectations for a rate cut start rising again over coming days we could well see Sterling pull back again.

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