The Pound Steadies as UK Concedes on EU Migrant Rights and Tusk Hints at Compromise on Irish Border

© Number 10 Downing Street

The UK's Home Office has quietly made a concession to the European Union that will go some way towards the sealing of a Brexit transitional deal at the end of this month, something which should underpin Pound Sterling we believe.

The UK has said it will now allow EU migrants entering the UK during the Brexit transition period to live, work and study as under current rules which amounts to a relatively under-reported concession made by the UK to the EU in order to press negotiations forward.

"EU citizens and their family members who arrived during [the implementation period will be able to stay on and ultimately settle under UK law", writes the Home Secretary Amber Rudd in a letter seen by ITV.

Previously, the UK said there would be a difference in the rights afforded to European nationals who arrive before Brexit and those who come during the transitional period. The European Union saw the UK's previous position as a major stumbling block as they wanted full rights to be conferred under a transitional deal.

This is good news for the British Pound which has over the course of the past 24 hours been shaken by fresh concerns that the gap between the EU and UK ahead of the end-March deadline to agree on a transition was too wide to cross. "GBP continued to trade lower overnight, in response to the publication of EU’s draft withdrawal agreement. Focus remains on the same old – there can be no transitional agreement without a withdrawal agreement," says Saktiandi Supaat at Maybank in Singapore.

Achieving a transitional deal is essential if Sterling is to maintain its current levels against both the Euro and Dollar.

"We maintain our view that an agreement on the transition will be reached eventually, but that there is a non-negligible risk of some delay. This is likely to keep GBP on the weaker side for now," says Kathrin Goretzki, FX Strategist at UniCredit Bank.

For the Pound, panic is yet to set in judging by its recent moves; Sterling is seen steadying following a rough month-end, trading at 1.1276 against the Euro and 1.3760 against the Dollar but let's be clear - all exchange rates are well within recent ranges and this suggests to us markets see a high probability of a transitional deal being struck.

Moves on EU citizen's rights - such as that being reported here - will certainly go some way in providing confidence to the view a transitional deal is still on.

The UK's new plans suggest immigrants staying for more than three months will have to register and after five years apply for permission to remain - a process that already applies to immigrants arriving from outside the EU. However, after the transition period family members will have fewer rights and we will wait to see if this is acceptable to European negotiators.

"GBP remains caught in tug of war between Brexit uncertainty and hawkish BoE but the former is weighing on sentiment for now (hence risks skewed to the downside in the interim," says Supaat.

EU's Tusk Signals Potential for Compromise on Irish Border

The big sticking point that must be resolved now is the issue of the Irish border which has flared up in spectacular fashion at the turn of the month. Reports this morning confirm Northern Ireland unionist parties have united against the EU's position that suggests a border will ultimately have to be created within the United Kingdom should no credible solution to the border issue be found.

In a legal draft covering the UK exit from the EU, the EU warned no such solution had yet been forthcoming.

However, the strength of the response by the UK government and Northern Ireland unionists might serve as a reminder to the EU and Irish governments that compromise must be given if this issue is not to derail the entire Brexit process.

On Thursday, March 1 the BBC's Adam Fleming reports that EU Council President Donald Tusk will ask Prime Minister Thersa May "if she has a better idea to avoid a hard border between Northern Ireland and Ireland than the EU's proposal for a single regulatory area."

Importantly Fleming reports Tusk as saying member states "will approve most elements of the draft text".

There is therefore wiggle room here and Tusk has hinted that changes will be made and we expect this should keep the Pound on an even keel.

"We believe GBP’s decline this week is more Brexit sentiment driven – rather than a reassessment of UK economic fundamentals – and point to the 2-3 year part of the UK rate curve staying fairly resilient. History suggests that under such episodes, GBP has the propensity to correct more sharply if we get any good news. We’ll need a catalyst, but risk-reward favours not chasing Brexit sentiment driven moves lower in GBP," says Viraj Patel, an analyst with ING Bank N.V. in London.

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