Reports a Brexit Deal Could be Agreed Before the Weekend

- Barnier warned by France not to concede too much to UK
- GBP falls sharply, stabilises into Thursday
- Intra day volatility likely to increase
- But expect sizeable moves to be faded

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• Market rates: GBP/EUR: 1.1066 | GBP/USD: 1.3400
• Bank transfer rates: 1.0856 | 1.3127
• Specialist transfer rates: 1.0990 | 1.3300
• More about bank-beating exchange rates, here

The British Pound is recovering on Thursday amidst reports that post-Brexit trade negotiators could be on course to deliver a deal before the weekend.

A headlines out on Thursday from the Daily Mail says a deal could be agreed as soon as today, following intensive overnight talks in London.

Ireland's foreign minister Simon Coveney has meanwhile said a deal can be done within the next few days.

The Telegraph is reporting that Barnier told EU ambassadors on Wednesday the UK has already lowered its demands for a greater share of the catch in UK waters after Brexit, raising hopes that one of the most difficult areas of the talks could be concluded.

Newswires are also suggesting that fisheries and governance remain the two outstanding areas, meaning the tussle over level playing field regulations might have been put to bed.

Considering the topic of governance was always meant to be the final area to conclude - given it can only be negotiated once all other agreements were in place - the only real issue of contention looks to be fisheries.

Barnier said to EU ambassadors on Wednesday the UK had signalled that it could accept 60% of the value of stocks from UK waters from January 1, down from the 80% the country had been initially holding out for.

Talks could therefore come down to a final compromise on the percentages involved in fisheries, but France's desire to protect its fishing fleets could yet prove to be a sizeable hurdle to leap.

"Fishing nations such as France, Denmark, the Netherlands, Belgium and Spain fear Mr Barnier may cave too easily to British demands as talks enter their endgame. Paris insists the UK red line of annual fishing negotiations is unacceptable," says the Telegraph's James Crisp.

The pound-to-euro exchange rate fell to its lowest level since October at 1.1008 on Wednesday before recovering some ground to close 0.75% lower at 1.1040, it is back up at 1.1070 on Thursday.

The pound-to-dollar exchange rate was however less impacted, merely paring Tuesday's strong gains to end 0.50% lower at 1.3360, it is back up at 1.3400 at the time of this article's latest update.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

The positive developments come mere hours after the UK currency fell sharply amidst reports French officials want the EU to declare talks have failed unless the UK accepts EU demands within 48 hours.

Furthermore, France said they would veto a deal they felt was not in their best interests.

This week has been characterised by rising tensions between the two sides, which is to be expected as negotiations are typically at their most tense before a final conclusion, as was the case with the EU Withdrawal Agreement negotiations.

"Last-minute Brexit jitters have pushed GBP/USD back below the key 1.34 pivot, but we continue to see this as part of the negotiation process. We continue to expect a deal, but not before the 11th hour. It looks like we have an hour or two more to go as the Brexit process unfolds according to its own timeline - not the FX market's. We remain GBP sellers on an eventual deal announcement, but choppy market conditions may dominate first," says Mark McCormick, Global Head of FX Strategy at TD Securities.

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"Weakness in GBP perhaps reflects a nervousness that while previous Brexit deadlines have come and gone, the clock is now truly ticking," says Daragh Maher, Head of FX Strategy, U.S. at HSBC in New York, "but the working assumption still seems to be that a deal will be secured shortly."

The EU's Chief Negotiator Michel Barnier said to EU ambassadors on Wednesday that "talks stand in the balance", while France's Emmanuel Macron told media in Paris on the same day that he is keeping a close eye on Brexit trade negotiations and won’t sign up to anything that goes against France’s long term interests.

"France pushes for no-deal Brexit if Britain will not budge," went a headline in the Times that appears to have contributed to sterling's decline in mid-week trade.

"France and other hardline countries are pushing for no deal in Brexit talks to soften up Britain before a reset in negotiations next year, unless the government makes significant concessions in the coming days," said the report. "The hardliners" suggested that unless the UK "backs down over the next 48 hours", the EU should declare that negotiations have failed and allow the economic pain of a short 'no deal' period to "bring a chastened Britain back to the table next year".

"We warned before for the pound to become particularly sensitive to negative Brexit headlines as markets have more or less discounted a deal will be brokered eventually," says Mathias Van der Jeugt, an analyst with KBC Markets in Brussels. "The UK Times reported countries including France are increasing pressure on Britain, saying that unless the UK compromises in the next 48 hours, the EU should declare negotiations have failed and brace for no deal."

While there is still a belief amongst most analysts that a deal will be done, some market participants are growing wary of a tactical mistake by either, or both, sides.

Political commentator and journalist Andrew Neil points out how such a tactical mistake could occur, saying of France's 48 hour deadline tactic:

"Could be just a last-minute tactic. But if it's more than that, it is a significant miscalculation by EU. UK will not return cap in hand. More likely to conclude that if a liberal country, free market, free trade economy, backing net zero, with close military/security ties to Europe can only get a 'punishment beating' deal with EU then the UK will proceed with no deal and make the best of it, whatever the short-term pain. Instead of being chastened, UK likely to be defiant. And EU/UK relations would be in the freezer for years. Not good."

The BBC's Europe Editor Katya Adler reports there is a deeply-held belief in Brussels that UK must now move considerably on the three still outstanding issues of fisheries, competition rules and governance in order for there to be a deal this year.

She also reports EU countries are growing nervous as to the concessions the EU Commission's negotiating team might be making to the EU.

"This is the painful part" one EU ambassador told Adler.

The movements in sterling over the past 24 hours suggest the currency is entering a period of heightened volatility, whereby rumours and unsubstantiated reports move the market.

"Sterling tumbled from three-month highs after the latest Brexit developments cast renewed doubt on the UK and EU reaching a trade agreement. With Brexit negotiations thought to be near a pivotal end game, the pound could be at heightened risk of volatility over the coming hours and days," says Joe Manimbo, Senior Market Analyst at Western Union.

However, only a final conclusion will trigger a more sustained move, higher or lower, in the value of the currency and intra day moves will likely be faded.