Pound Sterling: "Brexit Talks Face a Roadblock" to Keep Upside Limited against Euro and Dollar

- France yet to yield ground on fisheries
- Pressure growing on Germany to intervene
- Analysts say deal still likely

- "We continue to see a path for a sharply higher GBP/USD" - Goldman Sachs


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The British Pound will fail to register fresh highs against the Euro, Dollar and other major currencies in the forseeable future amidst building anxiety that a final showdown over fisheries in ongoing post-Brexit trade negotiations could take weeks to resolve.

The UK and EU teams are to remain engaged in talks in London until Wednesday before decamping to Brussels where they will continue amidst reports that progress is being made in numerous areas and it was reported at the start of the week that it is hoped a solution can be found and the shape of a deal can materialise by Saturday. 

However it is also reported the two sides are at an impasse on the matter of the future access of EU fishing fleets to UK waters, and any deadlock here might only be broken at the political level.

This means it could be weeks before a breakthrough is achieved, in which time Sterling could be left floundering in choppy waters around current levels.

"Brexit talks face a roadblock this week after France refused to compromise on fishing, with Government sources hoping Angela Merkel will intervene to break the impasse," reports The Telegraph.

Sources close to the negotiations told the newspaper that French Prime Minister Emmanuel Macron was refusing to soften his stance on the issue, and had in fact adopted an "egregious" position on the issue.

It is believed the UK is seeking a similar fisheries relationship with the EU as that enjoyed by Norway, whereby quotas are set on an annual basis but coastal EU states, lead by France, want a long-term deal decided now as their leverage on the matter will be reduced significantly once a deal is agreed. This allows them to leverage the broader trade deal in order to gain access to UK waters, knowing that once a deal is agreed leverage in future negotiations over fisheries will be greatly diminished.

Sources told the Telegraph France has "not moved at all" leading to fresh deadlock and suggestions it will soon fall to Germany's Angela Merkel to push France into a compromise in order to save a deal. A UK Government source told The Telegraph: "We are relatively optimistic but that doesn’t mean it won’t end in tears. Fisheries is the biggest thing. We are hoping Merkel can unlock Macron on fisheries."

The findings to contradict reports out late last week that suggested France was prepared to accept it would lose part of the current access to UK waters it currently enjoys, with some political commentators saying this was proof they were ready to compromise.

"Recent acrimonious negotiations are mostly posturing," says Zach Pandl, an economist with Goldman Sachs in New York. "Both sides appeared to show some more flexibility on outstanding issues like level playing field arrangements and fisheries, and each was satisfied enough to take negotiations to the next level."

GBP EUR forecast

While the Pound is not bounding to new highs it nevertheless continues to maintain levels empathetic with a view that a deal will ultimately be reached and traders will likely hold the currency in a sideways trend until some concrete developments emerge.

The Pound-to-Euro exchange rate looks to have established an upper limit towards 1.11 this October, with downside being held in the 1.0870 vicinity, ensuring 1.10 is the fulcrum. Choppy price action around this level will likely persist over the three two weeks in the run up to a mid-November meeting of EU leaders where it is hoped a final deal will be agreed.

GBPEUR range Danske BAnk

"The main issues remain fisheries and level playing field conditions," says Jakob Ekholdt Christensen, Chief Analyst at Danske Bank. Christensen notes GBP/EUR is now trading in the upper end of the recent 1.0870-1.11 range but he does not think the cross will move above 1.11 "until we get more positive signals that a deal is in sight". 

The Pound-to-Dollar exchange rate is meanwhile unable to really push an advantage above 1.31, with strength yielding to falls below 1.30. However, the floor for this pair is the hard support that lies between 1.27 and 1.28.

"A deal, which remains our base case, will likely result in a fresh leg higher for the Pound," says Nikolaos Sgouropoulos, analyst at Barclays.

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Goldman Sachs meanwhile tell clients they see the chance of substantial gains in Sterling over the course of coming weeks if a number of uncertainties are resolved.

"We continue to see a path for a sharply higher GBP/USD cross into year-end - if several risk events cut in the right direction," says Pandl.

Pandl and his team are looking for "outsized appreciation" in the event of:

(i) the US election makes substantial fiscal stimulus more likely
(ii) a number of vaccine candidates prove to be safe and effective
(iii) the Brexit talks conclude with a deal, even if it’s a fairly narrow one.

Goldman Sachs are looking for GBP/EUR to rise to a forecast target of 1.15 in the event of a Brexit trade deal being agreed.

The Sunday Telegraph reported at the weekend EU Chief Negotiator Michel Barnier had agreed to extend negotiations in London until Wednesday 28th October, "amid cautious optimism on both sides over the revived negotiations."

Previous arrangements had envisaged the two teams reconvening in Brussels this week.

Negotiators are now only expected to move from London to Brussels for further talks on Thursday, "with UK and EU sources effectively setting Halloween, next Saturday, as a deadline to decide whether the two sides will be able to reach a deal," reports the Telegraph.

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