Sterling fell yesterday afternoon as Theresa May failed to agree a deal to move Brexit talks onto future trade.
The UK government had downplayed expectations going into yesterday’s lunch meeting, but EU chief negotiator, Barnier, told lawmakers that a breakthrough was imminent which caused the Pound to rise. According to the Irish Prime Minister, a solution to the Irish border issue had indeed been agreed yesterday morning, but then fell apart during May’s lunch with the European Commission President. It seems they’d made a deal over the Irish border but Theresa May had failed to properly run this past the Democratic Unionist Party (DUP) – the party which provide a working majority for May’s party in Parliament.
During yesterday’s lunch, Theresa May apparently took a break to call the DUP leader, Arlene Foster, who told May that the terms of the Irish border deal were unacceptable and it would lead to them cancelling their confidence-and-supply pact with the Tories. The DUP do not want Northern Ireland to continue to be governed by EU laws and have different terms to the rest of the UK. This meant that no deal was made yesterday, causing Sterling to be sold back.
This sticky issue clearly exposes the political weakness that Theresa May suffers from after she called a snap election in June and lost a precious Tory majority. Not only are the DUP unhappy with the idea of Northern Ireland remaining in some form of the Single Market/Customs Union, but also the harder Brexiteers within the Tory party, meaning that May is having to battle on multiple fronts. So, it’s back to the drawing board for now, but both sides still seem very confident in being able to resolve these issues before the 14/15th December EU Summit. May is meeting with the DUP today and apparently could be heading back to Brussels as soon as tomorrow. If they can make a deal to move forward onto trade talks, then we would expect a decent boost for Sterling and conversely no deal would create some heavy Pound losses. Watch this space.
We had some weaker-than-expected UK service sector data out this morning, which surprisingly hasn’t weakened Sterling much further. As a result, the GBP/EUR and GBP/USD are both down 1-cent from yesterday’s peak.