- GBP recovers from earlier losses
- Newswire reports significant progress in talks
- Earlier GBP fell suddenly on negative headlines
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- Spot rates: GBP/EUR: 1.1005, GBP/USD: 1.2973
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The British Pound has recovered from falls suffered earlier in the day on the back of a newswire headline that EU sources have assessed that the latest round of EU/UK talks have been "one of the most positive so far".
Sterling is once more proving highly sensitive to Brexit newsflow, with gains coming after Reuters reported on Tuesday afternoon of "big progress" in Brexit talks, which they say leaves the EU seeing a trade deal as being closer.
According to the report, EU diplomats said Brussels was now gearing up to negotiate until as late as mid-November - rather than cutting talks off at the start of next month - to avoid a damaging 'no deal' scenario when the UK's transition period ends on December 31.
While there was no breakthrough at last week’s negotiating round on the three most contentious issues - fishing rights, fair competition guarantees and ways to settle disputes in the future - the prospects of an overall accord looked much brighter according to the report.
"We seem to be getting closer and closer to a deal, even though the no-deal rhetoric in public might suggest the opposite," one of two sources told Reuters.
Both are said to have been been briefed in detail by the European Commission.
The developments sparked a recovery in Sterling: GBP/EUR rose back to 1.1005 having been as low as 1.0957 earlier and the GBP/USD went back to 1.2969 having been as low as 1.2920 earlier.
"From our perspective, we think Brexit issues will remain a tactical volatility driver for sterling, especially during times when it is topical, this week, for example," says Ned Rumpletin, a foreign exchange strategist at TD Securities.
Sterling had dipped in late-morning London trade with market participants citing a newswire report that the EU will not be ready to meet the UK's soft deadline for a Brexit trade deal to be agreed by October 15.
According to a Bloomberg report, the EU is willing to call Johnson's Bluff and let the October 15 deadline go unanswered which suggests a slight rising in the prospects of a 'no deal' outcome to talks relative to the improving sentiment on the matter seen over recent days.
Johnson had previously said that if the EU and UK fail to reach a post-Brexit trade deal by the October 15 EU Council meeting, the UK would be better served by walking away.
"The European Union has no plans to offer concessions to Boris Johnson before next week's Brexit deadline, betting that the UK prime minister won't make good on threats to walk away from trade negotiations if he doesn't get what he wants," reports Bloomberg.
A number of foreign exchange participants confirmed these headlines to be the most likely source of a sudden drop in the valuation of Sterling:
The Pound-to-Euro exchange rate fell 0.36% in the wake of the report to quote at 1.0978, the Pound-to-Dollar exchange rate fell 0.45% to quote at 1.2938.
Above: GBP falls on negative Brexit headlines. If you have Sterling-based payments and would like to protect your budget we would suggest exploring locking in today's rate for use at a future point. Alternatively, it is possible to set up orders that are filled automatically when your ideal rate is achieved. Find out more here.
The volatility in the Pound serves as a reminder of the heightened short-term volatility that will be present as the EU and UK battle towards a final deal.
The markets are reading the substance of this particular Bloomberg report to be that the chances of a 'no deal' outcome to negotiations have risen, as Johnson might well fulfil his earlier promise to walk away from talks if no deal is forthcoming.
"The bloc is ready to let U.K. talks drag on into November or December, and even take a chance on Johnson pulling the plug on the deliberations rather than compromise on its red lines, according to a senior EU diplomat. The high-stakes strategy was confirmed by a second EU official," adds the report.
However, the market reaction does also seem to be a little misplaced since it has been clear for a number of days now Johnson is softening his stance on the deadline and has indicated a desire to keep talking beyond October 15, provided there were signs of progress coming from the EU side.
This softening stance was ultimately confirmed by the outcome of Johnson's talk with European Commission President Ursula von der Leyen on the weekend, where both sides agreed to intensify communications in order to achieve a deal.
There have been notable tell-tale signs that talks are likely to extend into November, which makes any sudden focus on the October 15 soft deadline as being somewhat strange.
"The video call between the UK Prime Minister and European Commission Head on Saturday resulted in a relatively upbeat assessment of recent negotiations. The post call statement exulted their negotiators to fill in the gaps ahead of the 15 October leader summit, which coincides with the UK’s latest soft deadline. However, we would not be surprised should the talks extend towards month end and even potentially into early November, if a deal is to be struck. In the near term, we anticipate some downside pressure on GBP/USD given that main issues remain unresolved. Support comes at 1.2680," says Jeremy Stretch, foreign exchange strategist at CIBC Capital Markets.
While the tenor surrounding Brexit trade negotiations have improved of late, the sudden dip in Sterling on Tuesday serves a reminder that the road forward will be a bumpy one and the only real guarantee is one of volatility.
If you have Sterling based payments and are nervous of impending volatility we would suggest securing current rates, or automatically securing your ideal rate in the future when it is reached. More on this here.
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