The pound has extended its recovery against the euro as we head towards the end of the second week of the year. This is in the wake of an initial meeting between Prime Minister Boris Johnson and EU Commissioner Ursula von der Leyen, who hinted that the UK and the EU could reach a semi-deal by the end of 2020. These reassurances have eased the pound, and hopefully means that during the first half of the year, sterling might not react with too much volatility. At the time of writing, the pound is at 1.1773 against the euro, and 1.3081 against the dollar.
New-Style Trade Negotiations
During an audience in London yesterday, EU Commission President Ursula von der Leyen said that the UK and the EU would prioritise parts of trade deals which could be agreed over the next 12 months, even if the entire deal would not be ready in time for the UK’s exit in December 2020. The Withdrawal Agreement was agreed in a systematic way, looking at different industries, regulations and standards, to come to a package deal. The structure of the trade deal negotiations will probably differ quite substantially to the Withdrawal Agreement.
No Deal Risks Lowered
Whilst this is good news for sterling and the markets, it doesn’t completely eradicate the risk of “no deal” Brexit. If we look back over the last three years, the pound’s low points tended to be when the markets had high concerns that the UK would leave the EU without a deal – usually because there were one or two contentious points that Withdrawal Agreement negotiators couldn’t agree on, which would hold up everything. This new arrangement means that the UK can leave the EU without the “full package” agreed. However, as this is new territory, we are unsure how this will work in practice.
Moreover, this unique arrangement also means that the Prime Minister can keep his promise of not extending the UK’s transitional arrangements with the EU beyond December 2020. Part of his success in last year’s General Election was based on many disgruntled leave voters believing Johnson was the only political party leader who would be able to take the UK out of the EU. This resulted in a huge majority for the Conservative Party- something that Prime Minister will be acutely aware of, and as a result, will want to deliver on Brexit.
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