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British Pound Firms after Leaders Look to Intensify post-Brexit Trade Negotiations

- Johnson, von der Leyen to discuss "next steps" this weekend
- Reports suggest progress towards deal ongoing
- But deal now only likely in Nov or Dec.


Above: Michel Barnier updating media on state of EU-UK trade negotiations. Photographer: Claudio Centonze. © European Union, 2020. Source: EC - Audiovisual Service

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Pound Sterling rallied on Friday amidst further evidence Brussels and London are creeping towards securing a Brexit trade deal, but the currency is expected to remain  highly volatile ahead of the weekend as investors await further headlines concerning the state of Brexit trade negotiations.

The final round of official negotiations ended today with no breakthrough but it has been confirmed by the office of EU Commission President Ursula von der Leyen on Friday morning that a call will be held between von der Leyen and UK Prime Minister Boris Johnson on Saturday, where "stock-taking of negotiations and discussion of next steps," will be on the agenda.

That "next steps" are forthcoming is a particularly supportive message and hints towards further progress and it could well be why the British Pound is outperforming its peers on Friday.

"The pound rose ahead of planned Brexit talks this weekend between U.K. Prime Minister Boris Johnson and the president of the European Commission in a bid to forge an elusive trade agreement. Sterling continues to fluctuate as a barometer of confidence toward an amicable trade deal," says Joe Manimbo, Senior Market Analyst at Western Union.

Nick Gutteridge, a freelance Brussels reporter for The Sun and other national titles who has a strong record on covering Brexit negotiations, says the news out of von der Leyen's office is "a promising sign".

"To elaborate the EU position has been there's no point holding another High Level Meeting unless there's an opening to be explored. As leaders Johnson and VDL won't be drilling down into detail. Their task is to come up with a political trade-off the negotiators can make reality," says Gutteridge.

Commenting ahead of the call, von der Leyen confirmed the EU's intention to keep working towards a deal:

"We'd have to work on a mechanism where over time when things change there's an alignment and if there are problems and difficulties there must be a dispute settlement mechanism. There's still a lot of work to do. It's a matter of fairness.

"Therefore this is so difficult but overall where there is a will there is a way. I think we should intensify the negotiations because it's worth working hard on it. We're running out of time, 100 days to the end of the year, so it's worth it to step up now."

EU Chief Negotiator Michel Barnier meanwhile opted to forgo giving a media briefing following the talks, which is unusual. However, this in itself could signal progress has been made in talks and a deal is there to be made.

This is based on the view that the negotiators have typically been quite vocal and tended to wave papers at the cameras when they felt progress has not been made. Silence, in this instance, says a great deal.

"In Brexit negotiations these past four years, the sound of silence has always been the sound of deals being done. EU and UK officials close to the process who are happy to guide and explain their side of the argument all suddenly clam up. That’s when you know we’re close," says the Financial Times' Public Policy Editor, Peter Foster.

Pound Euro volatility on display

Above: GBP/EUR volatility on display

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With a lack of official guidance on the state of negotiations markets will be left watching the newswires for unofficial briefings and Sterling should remain volatile as a result.

We saw the impact these briefings can have on Sterling over the course of the past ten days as journalists quote officials who don't want to be named. This was particularly the case on Thursday when the Pound dropped, recovered and dropped again on such briefings.

The Pound-to-Euro exchange rate ended the day half a percent lower but is seen higher at 1.10 ahead of the weekend, while the Pound-to-Dollar exchange rate fell a third of a percent before rising to quote at 1.290 at the time of writing.

"Sterling is on the hook to some wild price swings on headlines, which we knew would be the case," says Neil Wilson, Chief Analyst at "No one wants to try 1.30 unless there are more concrete rumours from ‘sources’. Talks wrap up tomorrow – more market-moving headlines to come."

The question for markets is whether or not enough progress has been made for the two sides to enter focussed discussions that allows them to thrash out the final details of a deal to present to leaders. This 'tunnel' or 'submarine' phase is in itself a strong indication that a deal is likely.

Thursday saw it reported that UK officials say that their expected odds of reaching a deal are at 70%, a notable improvement than the 30% chance they held heading into September.

"It does seem like there are tentative signs of ‘progress’ despite all the chuntering around the internal market bill, which looks increasingly like a sideshow to the main event of trade talks," says Wilson.

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The FT reported that Barnier is expected to outline a "high bar" before agreeing to enter intensified 'submarine' talks; however, the newspaper says some EU Officials said they did not expect such submarine/tunnel discussions to commence from as early as next week.

Further reports suggest the 'submarine' phase is only likely to commence following the mid-month meeting of EU leaders at the European Council. This would mean a soft deadline touted by both the EU and UK will have been missed, and introduces the prospect of talks extending into November, and even December.

What does this mean for Pound Sterling's outlook?

Signs that the process has entered the 'submarine' phase would be a notable positive as it sends a strong signal that a deal is likely. However, expecting a deal this month is increasingly looking unlikely and therefore the Pound could be in for weeks of uncertainty which could mean further losses transpire or consolidation sets in.

An all-out negative scenario would be a bad-tempered briefing from both sides at some point today, which would indicate that they remain too far apart to enter into final stage discussions.

The Pound would likely fall notably under such a scenario.

"Brexit remains in focus and GBP has weakened on suggestions the latest round in negotiations has hit a snag. We had anticipated a souring of the week’s earlier tone and think GBP should continue to lag its peers near-term. Further out, however, we think sterling has a lot of bad news in the price and wonder if downside risks for cable of a No Deal outcome are starting to diminish," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.