Brexit Update – Pound Takes a Double Hit from Stalled Talks and a Second Strain

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Another weekend passes and still no progress towards an EU-UK trade agreement.

Once more, EU chief negotiator Barnier attempts to put a positive spin on it. In reality, however, the holidays are rapidly approaching, as is the end of Britain’s transition period.

From an EU perspective, their deadline of Sunday, 20^th December passed with little fanfare. UK fisheries reportedly continue to be a hurdle to a trade agreement.

With the end of the transition period approaching, we had talked of heightened volatility. Adding to the downside this morning, however, was news of a new coronavirus strain identified in the UK. Neighboring countries responded to the news by restricting travel from the UK. Countries that have, so far, restricted travel from the UK include Austria, Belgium, Bulgaria, France, Germany, Italy, and the Netherlands.

The British government also reintroduced lockdown measures, which will result in a gloomy end to a dire year for the British economy.

The Brexit Hurdle

According to reports from the weekend, UK fisheries remain the key hurdle, with the likes of Macron unwilling to compromise.

When considering the small contribution to the EU and the British economy, a no-deal Brexit as a result of the EU’s hard stance on unwavering access to UK fisheries would be perplexing.

As things stand, the markets appear confident that both sides will reach an agreement before the end of the year. Such an outcome, however, would likely need the EU to take a softer stance on access to UK fisheries.

With talks continuing this week, expect further Pound sensitivity to updates from the EU and from Britain.

The markets could become less hopeful of a deal if there is a lack of progress going into the 2^nd half of the week.

The Pound

At the time of writing, the Pound was down by 1.81% to $1.32761, reversing most of last week’s 2.27% gain.

Having found support from the rollout of vaccinations and a decision to extend Brexit talks, it was a double hit for the Pound this morning.

More details on the new coronavirus strain are going to be needed to ease downward pressure. At a minimum, the markets would need a confirmation that the new strain is not resilient to the COVID-19 vaccine. Ultimately, however, some progress towards an EU-UK trade agreement will be needed to appease the markets.

The hope is that the EU will soften its stance at the last minute. With another deadline passing, however, and the EU standing firm, it remains to be seen whether such a shift in position will materialize.

For the Pound, the worst-case-scenario would be a broader shutdown of borders, an extended lockdown period, and a continued lack of progress towards a Brexit deal.

Later today, Boris Johnson will be holding an emergency Cobra meeting as more EU nations ban UK travel. The markets will be expecting a press conference. Areas of focus will include Brexit and the impact of border shutdowns on supply chains.

There have already been calls from within the UK for an extension to the transition period.