Brexit: Will there be a deal?

03 December 2020

This week was set to be a landmark week for Brexit discussions, in preparation for the EU council meeting starting on 10th December. However, similar to last week, the week has been dominated by leaks and rhetoric from senior officials, and not much in the way of legitimate progress has seen to be made. Despite this, investors remain optimistic that a deal will be agreed.

Michel Barnier, announced on Friday last week that he had devised a plan to boost UK fishing quotas by up to 18%, as a way to get both parties on side on the most disputed issue, especially for France and French President Emmanuel Macron, however this was quickly dismissed by the UK, with one source saying “it’s derisory, nothing more to say about it”. There was excitement later, on Tuesday afternoon, when a reporter from the Times, said that UK-EU trade deal talks have entered the long awaited ‘tunnel’. This essentially means that all details had been decided and all that was left was for officials to finalise the agreement and give it a stamp of approval. This, naturally, led to much needed optimism, but was quickly shot down by sources from both sides within an hour who said that this was false information. On Wednesday, the Prime Minister spoke but said very little of note, by reiterating the point that the UK side was confident that a deal could be agreed but would be comfortable without one.

At time of writing, there have been no new developments since last week. We know that there are three key differences, and that both sides are confident that a deal could be agreed, and that Macron wants to protect French fisheries, and that we need a deal by 1st January, but we have known this since September, and this is no longer news.

Despite a significant amount of noise without any new information, Sterling has even reacted to anything coming out of the rumour mill. The pound rose 0.5% in the 10 minutes after Brexit discussions entered the “tunnel” despite a distinct lack of evidence, and dropped 0.3% after French officials said they would push for no-deal if the UK don’t make concessions, a threat which has been made multiple times over the past few months. Below is a GBPUSD graph, source from Bloomberg, which very clearly shows the volatility of the pound over the past week and how news has affected the currency pair.

Source 1: GBPUSD over the past week, highlighting how Brexit news has affected the currency

So, this bring us to next week. Will a deal be agreed by then, or will it be after the EU council meeting on Thursday? This mostly depends on the Internal Market bill. The bill was rejected by the House of Lords, and is due to be considered for amendments in the House of Commons on Monday, and senior EU officials have already stated that if the bill violates the Withdrawal Agreement there is no chance for a deal.

The most likely play by play events is that the UK and EU agree a deal in principle by Sunday (The BBC’s senior Europe editor has already said that EU sources predict that the “bulk of outstanding work” could be done in the next 24 hours), the Internal Market bill is thrown out or amended on Monday and finishing touches are made in time for the EU council meeting starting on Thursday. This is probably, a best-case scenario and there is likely to be more hiccups on the horizon, especially if Macron refuses to compromise.

The general consensus is that there will be a deal, and Sterling could increase by as much as 10% over the next year if this is the case. Investors have already positioned themselves for an agreement this month, with Sterling already increased by 4.2% since the start of November, and is set to rise to a two-and-a-half month high.

-Benjamin Bard, Market Analyst