At the start of the week, sterling was hovering around the psychologically significant benchmark rates against the Euro and Dollar, of 1.20 and 1.30 respectively. Currently at the time of writing, Sterling is sitting just below at 1.1986 against the Euro with cable sitting at 1.2978 (08.50, 18/2). Normally these figures would put the market in a good head space but the next few days bring trade negotiations, with some unflattering headline reporting as the anticipated fallout.
With that kind of potential negative sentiment on the horizon, the possibility for the Pound to continue its ascendance doesn’t feel realistic.
Holding off from any Euro or USD purchase in recent weeks has proven a sound strategy up to this point. The previous week saw the Pound-to-Euro exchange rate rise to its highest level since December, excluding the election rise, as the Pound-to-dollar recovered to a record high of 1.3069. The worry now is a year that ends in further deal deadlock, something the market is very aware of.
Will Stephenson of Privalgo states:
“Both sides ultimately want to avoid a messy end to the transition period and that’s what will give us some sort of compromise. The UK Government and EU states recognise that a stable agreement is in everyone’s interests because it is the financial markets which suffer and that potentially creates new problems as the talks drag on.”
For the UK, Chief negotiator David Frost will insist that the Johnson Govt. are only after a copy of an existing deal which can be seen working elsewhere. Countries such as Canada and South Korea are not subject to EU regulation but trade almost tariff-free with the group nations. The position of the UK is to refuse any residual control being held in British justice, regulation, or the sovereignty of British waters.
The EU is believed to be seeking the UK to commit to alignment on subsidies, comply with its standards on tax and stick to its rules on workers and the environment in order to ensure the UK does not become a competitor. Again, this raises the contentious issue of fishing rights. An area where France have a particular interest and are happy to allow hostility.
“Fishing cannot in any way be a bargaining chip in the negotiations”- French Foreign Minister Jean-Yves Le Drian
For anyone hoping to sell Sterling, this is surely a signal to do it sooner rather than later. Although 2020 so far has been strong for the Pound, negotiations hold a risk premium that all but ensure a cap on any gains. This is not helped by the fact that talks haven’t officially begun but there is an air of disagreement.
Something echoed by Ralf Martyrossian at Privalgo: “From our perspective, the GBP looks to be heading into a time of volatility and potentially short term losses. The problems that come with these kinds of trade talks will start to show themselves throughout 2020 and particularly as the transition period draws closer, so we can’t really see the Pound rising if the end result is a deal that’s more in line with the WTO.”