‘The Real Deadline’ For A Potential UK-EU Trade Deal

Marius Paun | London, UK | Senior dealer | Thursday, 12th November 2020

 

As Brexit negotiations appear to be going down to the wire, we thought it was about time to have a look at the euro against the pound sterling.

Where are we now? The EU envoy is currently in London trying to strike a last-minute agreement. Reuters reported ‘the talks are expected to last until the end of the week but there will be no updates this week with Brexit tentatively being on the agenda for the November 18th meeting between EU ambassadors’. So, unless we see a breakthrough, or conversely talks collapse yet again, there will be no news. Even politicians have had enough of the current stalemate?!!!

Previously both sides indicated that November 15th is the ‘last moment’ a trade deal can be reached if it is to be ratified by the respective parliaments by the end of the year. So, at the end of this week there is the so-called ‘soft deadline’, but in true UK-EU tradition that deadline is pushed further. The real deadline is now late next week, according to some insiders.

It’s fair to say that neither side is confident a deal could be reached this week. The remaining stumbling issues are fishing, a level playing field which includes state aid, taxes, worker rights and by extension some areas of financial services. Lately, the EU added the energy markets into the mix threatening the UK could lose access to it. Some analysts are speculating that was raising the stake to get some concessions on fisheries. In itself, fishing is rather a small issue so one could understand the view that it represents more of a political issue (a battle for giving up or not part of sovereignty even if it’s a small part just to prove a point) than an economic one.

Chances are talks will continue next week in Brussels. The best-case scenario for the markets is a simple free trade agreement, even if it’s going to take closer to December 1st. If history is of any guidance, EU leaders can always set up an extraordinary meeting pretty quickly if necessary. At the moment it seems investors are positioning towards a last-minute deal.

The Brexit negotiations might put extra pressure on the UK government to reach an agreement, preferably before President-elect Joe Biden is sworn into office in January. He made it clear that the US-UK relationship would be hurt in case of a no-deal Brexit. He values the Good Friday Agreement that ended the violence in Northern Ireland in 1960s and thinks like EU, a violation of the withdrawal agreement could damage the peace process in the region. Furthermore, Joe Biden was adamant the free trade negotiations between the US and the UK would also stop.

In an alternative scenario, but one seen as less likely, there will be no deal and the two sides will trade on the World Trade Organisation terms from next year. The next few weeks will be crucially important to gauge that scenario. The EU summit on December 10-11 is seen as the last option for the EU officials to agree or not. Beyond that, the last session for ratifying an agreement in the European Parliament is 17th December. Can anyone see the UK Prime Minister Boris Johnson delaying the decision into next year, Theresa May style, after being elected on exactly the opposite platform?

The pound sterling has strengthened against the euro lately on lingering hopes that finally something will be agreed as we approach year-end. EURGBP dropped from a high of 0.9290 touched on September 11th to a low of 0.8880 yesterday. It bounced right off that triple bottom trading around 0.8993 at the time of writing.

 

The chart shows a steady downtrend with the short-term moving averages below the long-term one and both pointing downwards. The price is now in between those MA after today’s strong rebound.

On the downside, the bears will be looking for a break back below the next support at 0.8944, followed by 0.8916. That could gather selling momentum for a retest of 0.8880. On the upside, there is plenty of resistance just above 0.900 marks to 0.920. However, the buyers will need to see a close above 0.9045 to think the rebound has legs. That would pretty much be the mid-level between 0.8860-0.9260, the range of price action of the past 6 months.