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Pound Sterling Starts New Week on Front Foot, Investors Expect UK to Return to Negotiating Table

- GBP is top performing currency at start of new week
- Market's not buying Johnson's 'Australia style' trade deal rhetoric
- EU and UK negotiators tipped to lay out path to further talks later today

Brexit and the Pound

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The British Pound starts the new week trading higher against the Euro, Dollar and most other major currencies in a sign that the foreign exchange market is not fully buying into UK Prime Minister Boris Johnson's threat to walk away from talks and that reaching a deal over the course of coming weeks remains the most likely outcome.

UK prime minister Boris Johnson on Friday said that further negotiations with the EU would be pointless without a "fundamental change" in Brussels’ position, he then said the UK was preparing for an 'Australia style' Brexit. Given Australia and the EU trade on WTO terms, this would present itself as a worst-case conclusion to negotiations for Sterling.

The developments sparked some short-term volatility in Sterling that ultimately faded before markets closed, leaving the UK currency relatively flat on the week against both the Euro and Dollar.

Johnson dialed up the 'no deal' rhetoric after EU leaders called on the UK to make all the necessary compromises to secure a deal following last week's European Council summit.

However, the value of the Pound on Monday betrays a market which is firmly of the belief that talks will continue over coming days, while foreign exchange analysts say a deadline of around middle-to-late November looks likely.

"Despite a public blame game and the idea of an ‘Australia-style’ Brexit, markets are pricing-in a final compromise between the EU and UK," says Jasper Lawler, Head of Research at LCG.

The Pound-to-Euro exchange rate is at 1.1050 at the time of writing, ensuring the October pair's range remains intact. The Pound-to-Dollar exchange rate is marginally higher at the start of the new week at 1.2938, in fact the Pound is higher against all its major G10 peers at the time of writing:

Pound is best performer

Above: GBP leads the field on Monday. Do you have an ideal rate in mind? You can book it with a buy order, learn more.

"Weekend developments & headlines is spurring demand for Sterling this morning. There is a growing perception the red lines maybe closing in & raising the chances of a deal. Sterling likes this," says Neil Jones, Mizuho Bank London's head of FX Sales for financial institutions.

EU-UK trade negotiations are expected by European officials to continue within days and the bloc's chief negotiator Michel Barnier is expected to hold a video conference call with his UK counterpart David Frost on Monday afternoon to discuss the structure of future talks.

There remains a further four weeks when there could be worthwhile negotiations before a deal would need to be ready for the ratification process in Westminster and the European parliament.

"The Johnson move was expected," a diplomat from a major trading partner told The Telegraph, "any move the EU now makes in the direction of Johnson he can celebrate as a victory and reaction to his threat to walk out."

Brussels sources also told The Telegraph, "there was a long history in EU negotiations of a walkout before a deal is clinched. They said significant compromises were already in the offing."

However, Kit Juckes, Global Head of FX Strategy at Société Générale says the market is now more likely split 50/50 on whether there's going to be a deal or not.

"We have hope that the Internal Market Bill will be watered down, and we're taking some comfort from Andrew Bailey's comments on negative rates. He doesn't like them much, though that won't help if the UK economy is smashed in the face by a no-deal exit. The short and long of it: If we don't get a deal EUR/GBP heads off somewhere between 0.95 and perhaps briefly the wrong side of parity as rates go sub-zero. But for now, the soap opera continues," says Juckes.

(EUR/GBP at 0.95 equates to GBP/EUR at 1.0526. If you would like to lock in current rates for use in the future, thereby protecting your international payments budget, please learn more here).

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Signs that the EU want a deal were solidified by numerous comments from EU leaders following last week's EU summit:

- European Council President Ursula von der Leyen on Friday said negotiators would "intensify these negotiations" this week
- Dutch PM Rutte says that he believes there is scope for talks next week between the EU and UK to take place in the spirit of compromise. Rutte said Brussels is 'ready to compromise' and accepts it won't get 100% of what it wants. He says he believes Boris Johnson also wants to compromise and is 'implicitly stating he wants the talks to continue.'
- French President Macron says he wants clear rules for French fishermen on Brexit, says fishing is not the issue why Brexit talks are failing. This does appear to be something of a departure from the maximalist stance Macron had been pushing of late.
- German Chancellor Merkel says we also have to show a willingness to compromise for a Brexit deal
- EU Council President Michel says the body is ready to continue with talks

By threatening to walk away, yet keeping the door open to talks, Johnson appears to be giving himself the space to portray any eventual deal as a victory for UK negotiators.

"It is ajar," the UK's most senior cabinet minister Michael Gove said in a weekend BBC interview of the prospect of further talks, "we hope that the EU will change their position – we’re certainly not saying that if they do change their position that we can’t talk to them."

This week is likely to see Sterling bucked by any subsequent briefings regarding the state of play of negotiations, but significant directional moves in the currency are unlikely to transpire until this 'phoney war' between the EU and UK reaches a conclusion and it becomes obvious whether a deal is likely or not.