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The domestic UK focus for financial markets ahead of the weekend was confirmation that Dominic Cummings, the senior adviser to Prime Minister Boris Johnson, would leave the position at year-end.
Cummings follows Lee Cain, an ally who served as Johnson’s Director of Communications, who quit on Wednesday night.
The duo are viewed by political analysts as being central to the UK's stance in ongoing post-Brexit trade negotiations, and the departures comes as talks enter their final and most crucial phase.
With the Pound being highly sensitive to developments on Brexit the news might have important ramifications, although the view of many currency analysts is that it remains too early to tell just how significant the recent developments are.
"Dominic Cummings will be following Lee Cain out of Number 10 Downing Street, potentially pivoting the government in a less extreme 'leave' direction. Perhaps this increases the chance of a deal being struck with the EU or maybe it's just a symptom of dysfunctional chaos within the government," says Jonathan Pierce, a spot currency trader at Credit Suisse. "I lean towards the former view."
The Pound fell sharply on Thursday on a combination of elevated anxieties related to the state of Brexit trade negotiations and a pull-back in broader investor sentiment from the euphoric highs experienced earlier in the week when news of Pfizer's successful covid-19 vaccine broke.
"The news of the possible departure of Dominic Cummings by the end of the year has raised questions whether it increases or decreases the likelihood of a ‘no deal’ with the EU. Reports suggest that significant differences remain between both sides in talks this week. Negotiations will resume in Brussels next week, with indications that they could be extended into December. The pound fell towards $1.31 yesterday, but has edged up to around $1.3150," says Hann-Ju Ho, Economist at Lloyds Bank Commercial Banking.
Cummings will however only be leaving at year-end, something he said he would like to do at the start of the year. It is unclear weather his departure is in keeping with this wish or whether developments within 10 Downing Street have forced it.
"The GBP is the outperformer among the major currencies overnight – possibly on news that arch-Brexiteer Dominic Cummings is leaving the government towards the end of the year. That doesn’t say much on how talks are progressing – of which we still hear conflicting reports. Nonetheless, we’re still expecting some good news on that front. For GBP/USD, a retest of 1.35 is still in play over the coming weeks," says Bipan Rai, North America Head, FX Strategy at CIBC Capital Markets.
Period: End-2020 - Q3 2021
Period: End-2020 - Q3 2021
With markets likely to increase focus on developments in Brexit talks over coming days given the rapidly-approaching mid-November deadline, the interest in Cain and Cummings from a FX angle is understandably heightened.
"I wonder if the departure of key Brexit architects from Downing Street means they think they their work is now done? EU/UK trade talks will go on into next week, and while time for a deal is definitely running out, the way the pound trades suggests some people are hoping a deal can be struck," says Kit Juckes, Global Head of FX Strategy at Société Générale. "Maybe some bears are throwing in the towel."
Juckes says he will be surprised if GBP/USD is anywhere near current levels in a week's time but is it going to 1.25 or 1.35?"
Credit Suisse's Pierce says he has initiated a 'short' trade (a sell) on EUR/GBP, with a stop-loss set at 0.9020 in the event that the bet on Sterling gains goes wrong. Looking at this from the other angle, this is a buy on GBP/EUR with a stop-loss target set at 1.1086.
"I tend to think a deal will be forthcoming and at the margin the recent resignations increase the probability. After the recent GBP fall I favour buying dips in Cable (GBP/USD) in the 1.3100/20 zone," says Pierce.
It will likely be post-Brexit trade negotiations where the majority of Sterling's focus will fall over coming days and weeks.
According to the BBC's Europe Editor Katy Adler, the EU on Thursday sought to underline time "really is running out to agree a post Brexit trade deal".
The EU and UK have been locked in intensive negotiations in London this week and familiar warnings are being sounded via briefings to favoured journalists that a lack of progress has been made.
Adler reports EU diplomats to be sounding pessimistic about the direction of EU-UK negotiations with a "a well-placed source" saying, "two weeks ago it seemed more positive. Now the only thing that’s moving is time".
A particularly negative comment for foreign exchange traders to digest came from one diplomat who suggested to Adler that a 'no deal' outcome might be useful "to clear the air" between UK and EU at this stage. Otherwise, he said, relations would be tense "from day one" after deal signed as both sides so far apart on common standards argument.
But it is perhaps the indication that negotiations will continue as far as December that is perhaps the biggest development of the week. "EU insiders" tell Adler the "last possible" moment is the last week of November.
This suggests that next week's EU Council summit is not in fact the deadline as had been a widely-held viewpoint of political commentators and currency analysts.
Adler reports that if there’s a deal to be done with UK, the EU will not want to endanger it with process.
The EU Parliament needs time to read the deal before ratifying it, but Adler says one influential EU diplomat told her, "if Parliament has to reconvene after Christmas to ratify deal - then so be it".
This observation chimes with a view held by analysts at Goldman Sachs, which we reported earlier this week, that negotiations could even slip into December.
"Negotiations will resume in Brussels next week, with indications that they could be extended into December. The pound fell towards $1.31 yesterday, but has edged up to around $1.3150 in early trading this morning," says Hann-Ju Ho, Economist at Lloyds Bank.
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