Sterling Spikes As EU Touts ‘Brexit Breakthrough’

What a difference a week can make.

One week ago, hopes for a last-minute Brexit withdrawal deal before the Oct. 31 deadline had reached a nadir after a reportedly contentious call between UK Prime Minister Boris Johnson and German Chancellor Angela Merkel. But a carefully orchestrated meeting with Johnson’s Irish counterpart Leo Varadkar, seen as the EU27 leader most sympathetic to a modified deal proposed by Johnson, revived hopes for an agreement on Thursday, and though some doubts reemerged over the weekend, the general tone of comments made by top EU officials, including chief Brexit negotiator Michel Barnier, has been positive.

I have just debriefed EU27 Ministers in Luxembourg. ?? unity remains strong. We want an agreement that works for everybody: the whole #UK & whole #EU.

On route back to Brussels to take stock w/ my colleagues.

Talks are difficult but I believe an agreement is still possible. pic.twitter.com/FxQHCajg5b

— Michel Barnier (@MichelBarnier) October 15, 2019

A Brexit deal “is still possible this week”, says EU Chief Negotiator Michel Barnier, adding, “It is high time to turn good intentions (into) legal text”https://t.co/02Nyv6uufb pic.twitter.com/cJPduVu3Sm

— BBC Politics (@BBCPolitics) October 15, 2019

The latest bullish comments come courtesy of Barnier, who warned that, although the UK’s proposal is complex and the EU is still trying to suss out all of the implications of Johnson’s proposed alternative to the Irish backstop, the EU27’s chief Brexit negotiator is optimistic that a deal will get done this week.

Barnier has requested that Johnson submit a revised plan to Brussels by midnight on Tuesday.

Following rumors that the British government wouldn’t be able to meet Barnier’s midnight deadline, Bloomberg reported that British negotiators have submitted a revised plan to Brussels Tuesday morning. Though it’s slightly past Barnier’s Tuesday-night deadline, Johnson and his team reportedly expect to have a draft legal text ready for diplomats to scrutinize by Wednesday.

Fortunately for Johnson – who lost a critical source of leverage, the prospect of the UK leaving without a deal, when Parliament passed the Benn Act last month last month, legally requiring him to request another Article 50 delay if Parliament hasn’t passed a new deal, or voted in favor of ‘no deal’, by end of day on Oct. 19. – French President Emmanuel Macron reportedly expressed reservations about approving another extension of the Brexit deadline beyond a “technical” extension of a few days to finish hashing out the final deal.

Though Macron caved last time around, the notion that the EU27 might not be able to muster the unanimous support for another extension offers Johnson more leverage. Even better: Macron praised Johnson’s new plan as a “serious” proposal.

Like last time, sounds like France less keen on extending the process again compared to some other member states – in theory, that might be helpful to UK, altho last time round, Macron agreed with the others to extend again

— Laura Kuenssberg (@bbclaurak) October 15, 2019

Cable rallied to just below the $1.27 level, though it pared some of its earlier gains following reports that some EU ministers who attended a meeting in Luxembourg had gotten caught up on the sticking points.

Throughout the entire Brexit ordeal, most of the big sell-side banks have maintained that the most likely outcome is that a deal will ultimately be reached before the UK leaves the EU (or Brexit will be called off altogether).

On Tuesday, JP Morgan’s credit strategists assured the bank’s clients that they can pare back their no-deal Brexit protection. Meanwhile, Mark Carney offered some “insight” into how the events of the next three weeks might impact the pound.

Mark Carney tells the Treasury Select Committee that ‘there will be material moves’ in the value of the pound in the run up to the October 31 Brexit deadline.

He says those moves could go either way depending on events. ??

— Jack Maidment (@jrmaidment) October 15, 2019

Mark Carney tells the Treasury Select Committee that ‘there will be material moves’ in the value of the pound in the run up to the October 31 Brexit deadline.

He says those moves could go either way depending on events. ??

— Jack Maidment (@jrmaidment) October 15, 2019

Mark Carney on what Brexit could do to the value of the pound:

‘This process is going to break one way or the other and the pound is going to move either up or down – there is great investment advice from your governor.’

— Jack Maidment (@jrmaidment) October 15, 2019

As parliamentary support for Johnson’s deal grows, analysts have noted the complexity of what Johnson is proposing to replace the hated Irish Backstop. Essentially, Johnson’s plan allows for a new backstop where Northern Ireland will exist in two customs zones, the UK’s and the EU’s. Importers in Northern Ireland will initially pay the higher EU tariff rate, but if the goods ultimately end up staying in Northern Ireland and not crossing into the Republic of Ireland, importers will be able to apply for a rebate.

Whatever happens, the EU is hoping to have a deal in place so that both sides can iron out the last remaining details and stamp it with their seal of approval during an upcoming EU Council summit.