Phase 2 negotiating guidelines may have opened a fresh can of worms for Sterling and, in a quiet week for economic data, politics will be front and centre.
The Pound clipped its recent losses against the Euro and Dollar Monday but commentary from strategists still suggests “sufficient progress” in Brexit negotiations is unlikely to prove a silver bullet for Sterling weakness in the short term.
Sterling was quoted 0.69% higher at 1.3394 against the Dollar while the Pound-to-Euro rate was marked 0.11% higher at 1.1348. This reverses only a small portion of Friday’s losses, which ran close to -1% against both currencies.
“It did not require particular prognostic abilities to realise: the euphoria about the fact that the Brexit negotiations have now moved on to “phase 2” did not last long,” says Ulrich Leuchtmann, head of G10 foreign exchange strategy at Commerzbank.
Earlier weakness came after the European Council declared Friday that “sufficient progress” had been made in the Brexit negotiations and that European negotiators would soon be able to discuss future ties, including the subjects of trade and transition.
Above: Pound-to-Euro rate shown at hourly intervals. Captures Friday sell off.
“As the UK rates market prices down the chances of rate hikes in 2018, so it is lowering its estimate of where we’ll be in 5 years’ time. Sterling, at best, will go on bumping along in the new (low) post-referendum range,” says Kit Juckes, chief foreign exchange strategist at Societe Generale.
Markets had eagerly anticipated Friday's move, with many commentators seeing it as a necessary step to unlocking further upside for the Pound however, Brussels’ publication of Phase 2 negotiating guidelines may now have opened a fresh can of worms for the British currency.
“UK PM May, having persuaded her EU counterparts to move on to trade talks in the enact stage of Brexit negotiations, now needs to herd her cabinet into a neat line backing her vision. To the most casual observer of UK politics, that’s a tall order,” adds Juckes.
British and European negotiators have said repeatedly that “nothing is agreed until everything is agreed”, referring to the agreements struck over the “financial settlement”, the Northern Irish border and citizens rights.
Prime Minister Theresa May has also said that there will only be a transition period, and a financial settlement for the EU, if it is clear in March 2019 what future relationship the UK will be transitioning to.
However, the European Council’s guidelines make clear that some amount of trade discussions will have to be left until after the UK’s scheduled departure date on March 29.
“While the agreement reduces the risk of the UK crashing out in March ’19 expect upcoming negotiations on trade to be hard fought, underlining elevated Sterling volatility. Only when we see signs of a successful trade resolution, boosting rate expectations, can we recommend a GBP rebound,” says Bipan Rai, a macro strategist at CIBC Capital Markets.
In theory, and as things stand, the guidelines may allow EU negotiators to draw talks out over the “clearly defined and precisely limited in time” transition period, during which British money will fill the budgetary hole created by the UK’s departure from the union, only to leave Theresa May alone at the altar at the end of that period.
At the very least, the guidelines and ongoing divisions in the British parliament may have laid the foundations for another bout of tension and “deadlock” to play out before further progress can be made.
“GBP/USD’s intraday Elliott wave counts are turning more negative. While we are unable to rule out a small rebound to the 1.3550 December high, this is looking less likely. Below 1.3300 should be enough to alleviate immediate upside pressure and allow for weakness back to the 1.3184 2016-2017 uptrend,” say Karen Jones, a technical analyst at Commerzbank.
With the UK economic data calendar absent of any market-moving news through much of the week, Sterling will be at the mercy of domestic politics and economic events elsewhere. The likely congressional approval of President Donald Trump’s tax plan in the US will be a key influence over the Dollar exchange rates including Pound-to-Dollar and Euro-to-Dollar.
This in turn will affect the trajectory of Pound-to-Euro. If the Pound-to-Dollar rate is able to rise faster than EUR/USD, or fall at a lesser pace, then the Pound-to-Euro rate will rise.
“EUR/GBP recovered last week following its recent failure to register a weekly close below its 55 week ma at .8744. Near term rallies should find decent resistance at .8871 55 day ma and then the .8913 resistance line,” says Jones.
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