Sterling jumped overnight following reports that the UK and EU have reached a rough agreement on the divorce bill for the UK leaving the bloc.
According to the newspapers this looks to be around the 50 Billion Euro mark and it potentially brings the two sides closer to moving onto discussing the future trade arrangements and a possible transition period. A transition period should help businesses adjust to the changes, helping avoid a cliff-edge scenario, and thus ensuring a smoother exit which is generally welcomed by the business community. The huge divorce figure, however, is likely to create uproar from both the Brexiteers and Remainers and therefore keep political pressure on Theresa May.
The agreement still needs to be passed through the different member states though. This is ahead of a key EU Summit in mid-December, where they will unanimously decide whether the talks can move onto the next stage or not. If this divorce bill is settled, then another major hurdle still stands in the way which is the Irish border issue. Ireland have said that they will not accept a hard border with Northern Ireland and will use their veto unless this is resolved. Clearly, if the whole of the UK is to leave the customs union and the single market, then this will not be possible without some creative ideas or exceptions to the rules. With the Northern Ireland (UK) and Ireland both wanting to avoid a hard border, but the Tory-supporting DUP adamant that Northern Ireland must leave both customs union and single market, this is a political minefield. Maybe the UK government have some plans up their sleeves on this though and were simply holding back until the divorce issues got sorted. Watch this space.
In other news, Trump’s proposed tax reforms took a step forward last night, as two Republican holdouts dropped their objections and the budget committee voted to send the bill to be thrashed out on the Senate floor this week. This is supportive for the USD as reduced corporation tax should stimulate growth and therefore increase the odds of further rate hikes by the Fed.
As a result, the GBP/EUR is nearly 2-cents higher from yesterday’s low and trades at a 2-week high. The GBP/USD has also bounced nearly 2-cents higher from yesterday and currently trades at a 2-mth high.