Pound retreats as post-Brexit trade worries return

Feb 3, 2020

The Pound has given up most of the gains it made last week after the EU and the UK outlined their stances ahead of the upcoming trade negotiations.

Boris Johnson and Michel Barnier provided almost opposite positions on some key elements of the future talks which highlights how difficult these discussions might be. The EU have indicated that market access will need to be linked to an alignment to EU rules to prevent unfair competition between the two parties. However, Boris has said that there is no need for a deal to involve the UK accepting EU rules and that the UK will continue to maintain high standards. Furthermore, he doesn’t expect the EU to have to follow UK rules as a price for free trade.

Amongst other differences, the EU have insisted that any future disputes in trade would require ECJ jurisdiction but the UK wants these resolved “without ECJ jurisdiction”. Barnier has also said that a deal will have to include fisheries (as UK has rich fishing waters) but the UK have said that this doesn’t need to be included in a deal.

Boris has insisted a trade deal can be reached before the end of the transition period (31st Dec 2020) but today’s divergent messages show how difficult this task might be. If a trade deal is not reached (or no extension granted) then the UK will trade with the EU under WTO rules (aka a hard Brexit) from next year. This is viewed as very negative for Sterling due to the disruption it would be expected to cause.

Obviously it’s early days, and both sides are just setting out their stalls, but this highlights the potential risks for Sterling over the coming months should concessions be slow to appear from the talks. The longer both sides play hard ball, the more likely Sterling is to feel the pinch as traders concerns of a hard Brexit mount.

As a result, the GBP/USD has fallen over 1% today and the GBP/EUR is down a cent.