The Pound LIVE: Sterling Slides Vs Euro And Dollar As Ministers Plan Laws To Override Part Of Brexit Withdrawal Deal

Dramatic escalation in UK/EU Brexit trade tensions undermine Pound Sterling, Dollar vulnerability provides some GBP/USD exchange rate protection

Brexit trade tensions have increased sharply with the UK government demanding a deal by October 15th and proposing legislation which would undermine the Withdrawal Agreement protocols on the Irish border if no trade agreement is secured. The Pound-to-Euro rate dipped to 1.1160 from last week’s highs around 1.1275 with the Pound-to-Dollar rate (GBP/USD) retreating to near 1.3200.

Image: Pound-to-Euro rate chart as at 7th September 2020

UK/EU trade tensions increase sharply ahead of key negotiating round

There were further political tensions surrounding the UK/EU trade negotiations as the teams looked to position themselves ahead of the latest round of trade talks which start on Tuesday.

Marshall Gittler Head of Investment Research at BDSwiss Group quotes UK Chief Negotiator Frost from the Daily Mail interview; "We are not going to accept provisions that lock us into the way the EU do things," he said, which of course is the chief goal of the EU – to ensure a “level playing field” between the two sides by making Britain play by the EU’s rules. Frost said the UK government was "fully ready" to trade with the EU without a formal deal.”

Foreign Secretary Raab stated that “the EU’s best moment to strike a deal is now.” He also stated that the issues of state aid and fishing were the only two points holding us back.

According to a senior EU diplomat “The chances for a deal, or a no-deal, are 50/50. There has been absolutely no movement from the British side in the talks. If this approach doesn’t change quickly, we won’t be able to negotiate a deal in time.”

European Council President Charles Michel told reporters: “Sooner or later, the UK should clarify what they want. It’s not possible to leave the European club and at the same time keep all the benefits.”

EU anger as UK threatens to back-track from the withdrawal agreement

Tensions increased further following reports that the UK government was planning on introducing legislation which would impact the Withdrawal Agreement on Northern Ireland.

Marshall Gittler, Head of Investment Research at BDSwiss Group quotes the Financial times article;

“The UK is planning new legislation that will override key parts of the Brexit withdrawal agreement, risking the collapse of trade negotiations with Brussels. Sections of the internal market bill — due to be published this Wednesday — are expected to “eliminate the legal force of parts of the withdrawal agreement” in areas including state aid and Northern Ireland customs, according to three people familiar with the plans. The move would “clearly and consciously” undermine the agreement on Northern Ireland that Boris Johnson signed last October to avoid a return to a hard border in the region, one person with knowledge of the plans said.

Gittler added; “If Britain goes ahead and undermines this crucial part of the agreement, it will be saying to Brussels “our signature on an agreement doesn’t mean anything.”

Ireland's Foreign Minister Simon Coveney tweeted that would be "a very unwise way for the government to proceed".

The UK insisted that this was a standby position in case no deal was reached, but the move will increase tensions with the EU sharply.

UK hard position increases economic fears

Prime Minister Johnson also stated that a deal was needed by October 15th to give enough time for ratification. He added that both sides should move on if no agreement was reached by then.

There was inevitably an element of sabre-rattling ahead of the talks with the government also looking to appease potential opposition to concessions from within the Conservative Party, but there were increased concerns that there would be a collapse in talks and Sterling lost ground.

Marshall Gittler added: “Some of this talk may be just bolstering the UK’s bargaining position, but in my view it’s a silly approach. A “no deal” Brexit would hurt the UK much more than the EU. Britain makes much of the fact that the EU has a big trade surplus in trade with the UK, which they say makes the UK more important for the EU than the EU is for Britain. However, the EU represents fully 49% of Britain’s merchandise trade (49% of both exports and imports), whereas the UK represents only 4.9% of the European Union’s merchandise trade, including 5.9% of exports and 3.9% of imports. Which will be hurt more: the side that suddenly has restrictions on 49% of its exports or the side that has restrictions on 5.9% of its exports? And that doesn’t include trade in services, which are even more important to Britain.”

Sterling reacted negatively to the more antagonistic rhetoric with sharp losses on Monday and comments will continue to be watched closely.

ING commented; “The main divisive point remains state aid and we don’t expect the UK to present an acceptable proposal for the EU next week…..with no imminent breakthrough in negotiations, the negative headline news is likely to increase.”

Sentiment will shift if there is evidence that concessions will be made.

Nomura commented; “we expect a no deal Brexit risk to weigh on the pound in September. We remain long EUR/GBP in cash, but recognise that the risks ahead are the Brexit talks find a compromise and/or GBP trades in line with risk sentiment higher.”

UK coronavirus concerns also increase, equities decline

The UK reported a sharp increase in coronavirus cases over the weekend. Outbreaks were reported at 62 schools over the weekend.

The data for Sunday recorded a sharp increase in new UK coronavirus cases to just below 3,000 for Sunday, the highest figure since May. There is the possibility of an erratic figure and testing has increased, but the magnitude of the increase will cause significant concerns.

There will tend to be increased reservations over the outlook for consumer spending and the wider economic recovery.

Global risk appetite has also weakened with a further slide in US equities on Friday. The UK FTSE 100 index dipped to 4-month lows on 4th September 2020 and losses are poised to extend on 7th September 2020.

Image: GBP/USD chart

Pound Sterling exchange rates will tend to be vulnerable if risk conditions remain less favourable.

US dollar fails to hold gains

US dollar exchange rates moves will also continue to have an important impact on Sterling trends.

The US reported an increase in non-farm payrolls of 1.37mn for August, slightly below consensus forecasts of 1.40mn and below the 1.76mn recorded for July. The unemployment rate, however, declined to 8.4% from 10.2% and below expectations of 9.8%.

Fed Chair Powell reiterated that US interest rates would remain close to zero for many years and the US currency struggled to gain sustained support with EUR/USD support below 1.1800.

U.S. Dollar vulnerability will help protect GBP/USD, but UK economic concerns will continue.

There are also expectations that the Bank of England will take additional action later this year. In comments on Friday, MPC member Saunders stated that the bank needed to act against downside risks and he expected a further increase in quantitative easing would be needed.

UOB commented; “as highlighted, the outlook is mixed and GBP could trade between 1.3150 and 1.3400 for a while.” Sentiment will dip if there is a sustained break below 1.3200.