Sterling jumps after EU’s Barnier hints Brexit deal imminent

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11 September 2018

thomasdodds

The Pound jumped by around one percent against the US Dollar on Monday, with comments from the EU’s chief Brexit negotiator, Michel Barnier, further raising hopes that an agreement on Brexit could be reached in time for next month’s summit.

S
peaking at a forum in Slovenia, Barnier stated that a deal on Brexit was realistic ‘within the next six to eight weeks’. This adds to the recent chorus of optimism from both sides of the negotiations that suggest a deal on the UK’s relationship with the EU could be reached before the 13-14th October summit, seen as the deadline for reaching an agreement. There now appears a decent chance that there could be a rough agreement in place in time for the informal summit in Salzburg later this month.

We have been saying for the last couple of weeks that we believed the market was placing too high of a likelihood on the possibility of a ‘no deal’ Brexit. These comments from Barnier appear to vindicate this view. The EU is just as keen to get a deal done in time for the March 2019 exit date as the UK government, which we believe used threats of a ‘no deal’ scenario as more of a negotiating ploy than anything else.

The Pound was also helped on its way earlier in the day by some encouraging GDP data that showed the UK economy grew by 0.6% in the three months to July, boosted by the World Cup and hot weather. Next up will be Thursday’s Bank of England meeting, although the central bank is almost certain to keep policy unchanged.

Euro rallies ahead of Thursday’s European Central Bank meeting

Barnier’s comments also dragged the Euro upwards yesterday, given the degree to which a smoother Brexit would alleviate pressure on the Eurozone economy. The common currency continues to trade around the 1.16 mark, with investors looking to this Thursday’s ECB meeting to see if the currency can break out of its recent range. We think that this week’s meeting could be a relatively low key one, given the main QE policy announcement is already behind us. We will instead look for comments from Draghi on the potential impact from Trump’s trade protectionism.

There was no economic data releases out of the US whatsoever yesterday, with currency traders largely concentrating on news out of the Brexit discussions. The market reacted in a relatively calm fashion to the weekend’s news that President Trump was ready to launch a fresh round of tariffs on Chinese goods. Barring any further developments on trade, this Thursday’s US inflation and Friday’s retail sales figures will be the key data points to look out for this week.