- EU said to be ready to concede ground on fishing rights
- GBP recovers further ground in relief
- Markets accused of being too pessimistic on Brexit trade talks
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The British Pound was easily the best performing major currency on Tuesday, July 07 with gains being recorded against all its competitors in the G10 space courtesy of positive headlines concerning Brexit trade negotiations.
The EU could be willing to compromise on the issue of fishing rights, according to a newly published transcript of the EU's Chief Negotiator Michel Barnier's meeting with the Lords Select Committee on the European Union. At the meeting, held on June 23, Barnier said:
"I recall that, for the European Union, things are simple and clear. The fisheries agreement that we want with the United Kingdom would be an indissociable part of the economic agreement on trade and the level playing field - or, to make it even more clear, there will be no trade agreement with the UK if there is no balanced agreement on fisheries.
"Is this balanced agreement the British position as it is? Certainly not. Is it the European position as it is today? Clearly not.
"If we both dig our heels in on those positions, there will be no discussion or agreement on fisheries and therefore no agreement on trade. That is not what we want."
Fishing is one of two main stumbling blocks to a deal and suggestions that some shift in the EU's position could be forthcoming has helped improve sentiment towards the Pound.
The scale of the UK currency's advance was notable with a 0.80% advance coming against the Euro and a 0.54% gain coming against the U.S. Dollar. But gains of a similar scale were recorded against all classes of currencies including the safe-haven Yen and Franc as well as the commodity currencies of the Australian and New Zealand Dollars.
This tells us that the advance is idiosyncratic to Sterling.
The Pound-to-Euro exchange rate has reached a new three-week high at 1.1145 while the Pound-to-Dollar exchange rate is at a similar landmark having reached 1.2574.
"I think what we're seeing here today is the market forcing out some weak shorts ahead of this week's Brexit talks. The headlines from Frost and Barnier have been largely negative to date and if you think about it, the leveraged funds (at CME) are not really positioned for positive surprises. In fact, they're continuing to build short positions. All that was working going into the start of last week, but it's no longer working and I think today's break above the 1.2520 resistance level was a pain threshold for some of these shorts," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada in Toronto.
Indeed, we reported on Monday of the significance of reports that negotiators were now preparing "landing zones" for the more difficult aspects of talks, which suggest some compromise is likely.
Even if the two sides fail to agree on some elements of a future trade deal before the soft October deadline, there is no all-or-nothing structure to the current round of talks, which certainly was the case with regards to the withdrawal agreement negotiations that ended in 2019.
In short this means that elements of a trade deal can still be pushed through even if there are still disagreements in some areas and makes a fear of a so-called cliff-edge significantly harder to justify.
The problem for foreign exchange markets is that they priced Pound Sterling towards levels that were consistent with such a cliff-edge, meaning the currency was looking oversold and ripe for a recovery.
The current rebound could therefore be a sign of some rebalancing.
Regardless, we do not see this as being the beginning of any sizeable multi-week uptrend and would await confirmation of progress from the next series of talks scheduled in Brussels next week.
This week the main negotiators are due to meet to keep discussions flowing, which could also provide some interest for Sterling traders.
Markets will also keep one eye on Chancellor Rishi Sunak who tomorrow delivers the Treasury's Summer Economic Update which should see a set of fresh fiscal initiatives announced.
The scale and credibility of any new taxation and spending plans could have an impact on foreign exchange markets with the the general rule of thumb that any upside surprises could prove positive for Sterling.
Currently market expectations for any sizeable stimulus that are low given the underwhelming nature of Prime Minister Boris Johnson's 'New Deal' announcement in the previous week that contained nothing new and instead detailed how existing spending plans would merely be brought forward.
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