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The fate of sterling hinges on the upcoming Brexit discussions

The GBP/EUR has whipsawed in recent days over expectations of a breakthrough in Brexit negotiations. Several major issues remain with the Brexit impasse, notably the Irish border, the rights of EU nationals living in the UK, and pension payments made by the UK to EU nationals. These issues remain central to Brexit discussions.
The fate of sterling hinges on the upcoming Brexit discussions

Unfortunately, proposals on the Irish border were summarily rejected by the Democratic Unionist Party. This sent the GBP/EUR currency pair lower, after several days of modest gains. On Monday, 4 December 2017, the GBP/EUR was trading around 1.141, and by the end of Tuesday, 5 December 2017, it had dropped to 1.132. GBP weakness is likely to persist in the absence of internal consensus in the UK.

Northern Ireland to be treated differently?

The Democratic Unionist Party rejected plans to have Northern Ireland remain part of the EU customs union after a Brexit agreement is concluded. Multiple issues are hindering progress in Brexit negotiations, and this is yet another stumbling block to consensus. Prime Minister Theresa May has been hard-pressed to present a unified negotiating position from the UK’s perspective, let alone convince European negotiators on best-practice methodology moving towards a negotiated Brexit settlement.

The EU summit on December 14, 2017 is regarded as a barometer of the GBPs movement. British Prime Minister May is attempting to convince the Democratic Unionist Party to allow Northern Ireland to be treated differently post-Brexit. Unfortunately for May, the DUP is part of the government, and any disagreement could result in political turmoil in the UK.

GBP draws strength from EUR weakness

Besides for internal strife, there are other pertinent issues impacting the GBPs performance. Olsson Capital trading experts are concerned that the latest services PMI data (Purchasing Managers Index) in the UK is going to weigh heavily on upcoming trading activity. In November 2017, the IHS Markit figures dropped to 53.8, from 55.6 in October. Analysts were anticipating a decline of just 0.6 points to 55 for November.

However, currency strategists are quick to point out that any figure above 50 represents a healthy and expansionary economy, while any figure beneath 50 is indicative of a contraction. GBP bulls were emboldened by bearish data from the EU. Retail sales dropped to -1.1%, for their fastest decline in over three years. This helped to stabilise the GBP/EUR exchange rate. Additional stress factors in the form of lacklustre factory orders data from Germany will help to keep the GBP trading at a competitive rate against the EUR and USD.

Will the UK break the Brexit deadlock?

Volatile trading sessions are expected if UK negotiators led by Brexit secretary David Davis and his EU counterpart, Michel Barnier, fail to advance Brexit discussions to the next level. The EU summit in mid-December is being watched closely by speculators across the board. The Irish issue is a sticking point in Brexit negotiations, as Northern Ireland does not want to sever ties with Europe over a Brexit. Fears abound that this may lead to a referendum on independence in Northern Ireland, much like the Scottish referendums in recent years.

Meanwhile, the cable (GBP/USD) has traded in a strong range, holding above the critical 1.3400 handle. At the start of the week, GBP/USD was trading above the 1.35 level in an encouraging sign for sterling bulls. Stakeholders are eyeing the possibility of a trade deal before the end of 2017.

A hard border with the Republic of Ireland would be a disaster for the UK, and the UK government is attempting to get Northern Ireland to remain part of the European Union customs union. Meanwhile, Bank of America Merrill Lynch has forecast that the GBP/USD pair could reach 1.40 by the end of 2018 in a surprisingly optimistic projection given the current economic realities.

11 Dec 2017 18:51

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About Boris Dzhingarov

Boris Dzhingarov graduated UNWE with a major in marketing. He is the CEO of ESBO ltd brand mentioning agency. He writes for several online sites such as Tech.co, Semrush.com, Tweakyourbiz.com, Socialnomics.net. Boris is the founder of MonetaryLibrary.com and cryptoext.com.




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