Sterling gained on its main competitors the euro and the US dollar as well as other major currencies after chief EU Brexit negotiator Michel Barnier said a Brexit deal could be achieved soon.
Barnier raised the chances of a withdrawal agreement being achieved in the next six to eight weeks and the currency trading markets reacted positively in favour of the British pound as chances of a ‘no deal’ Brexit seemed to be fading.
The volatility of the situation was highlighted by the fact that thanks to recent Barnier interjections, the UK’s GDP has appreciated by 2.75% in recent weeks.
Brexit day is on March 2019 and concerns have been centred around whether a ‘divorce deal’ would be reached or if the UK would crash out of the EU without any new trade agreements in place. This has weighed heavily on sterling in recent months and has resulted in multi-month lows against both the US dollar and the euro.
However, after Barnier’s new comments, the GBP/EUR exchange rate rallied to a multi-week best at 1.1240 and the GBP/USD rate achieved a multi-week best of 1.3051.
Foreign exchange strategists at Barclays explained: “Any progress that suggests an earlier agreement presents upside for the Pound.”
More gains for GBP are possible this week, according to Barclay’s assessment: “The GBP continues to oscillate on political headlines, and risks in the near-term remain two-sided, although heavy short positioning and a large negative risk premium discounted in the currency likely imply larger moves to the upside on positive political headlines.”
“The more positive tone between the UK and EU supported the pound last week, and a reduction of risk premia could bring mild EUR/GBP downside, although two-sided headline risk is high,” the bank added.
Michel Barnier’s position as the EU’s chief negotiator in the Brexit talks means that everything he says carries weight with investors and forex brokers alike. When he commented that there was a ‘realistic’ possibility a deal could be reached by November it was certain to have an impact on the GBP’s value.
Even so, problems remain in the negotiations, as Barnier told the Slovenia audience: “We have to solve the issue of Ireland and some others in the next six to eight weeks.”
The Ireland problem lies in avoiding a hard border between Northern Island, which is part of the UK, and the country of Ireland to the south which is a fully-fledged independent member of the EU.
A proposed ‘backstop’ would align Northern Ireland with the EU’s customs and single-market regulations and as a result, create a potential problem within the United Kingdom of Great Britain and Northern Ireland’s own trade and border arrangements.
The EU is “obliged” to control goods at its external borders, says Barnier, while Prime Minister Theresa May has said any solution that involves treating Northern Ireland differently from the rest of the UK is “unacceptable”.