The improved global market sentiment and the slowing of Covid-19 case rates has helped the pound to recover, but Brexit anxieties could pose a potential threat to the currency.

Covid-19 and the NHS app

This week alone 96 deaths have been reported, the highest number since March. While on 1 June there were 0 coronavirus deaths, 1,114 deaths have been reported since then with 73 deaths being reported on Wednesday (21 July). The vaccination programme has not managed to break the link between infections and fatalities, with the total number of deaths from the pandemic reaching 128,896. However, new cases have not risen considerably, as the number of new cases that were reported on Wednesday was 44,104, slightly higher than the previous week’s 42,302. As it stands, 46,388,744 people have been vaccinated at least with the first shot in the UK. According to statistics, around 39,035 people had their first jab on Tuesday, while 161,279 people had their second shot yesterday, with 36,404,566 people now being fully inoculated.

With the ongoing self-isolation of workers due to coming into close contact with a positive coronavirus case, businesses have been affected, while the government has expressed its apologies for the inconvenience. Director of food and sustainability at the British Retail Consortium Andrew Opie told The Times that the "pingdemic” has put pressure on retailers who found it difficult to keep stores open and shelves stocked, demanded that the government needed to act fast.

Boris Johnson, speaking at the last PMQs before the summer recess, said "everybody understands the inconvenience of being pinged". The prime minister himself had to isolate after coming into contact with Covid-positive Health Secretary Sajid Javid last week.

Labour leader Sir Keir Starmer accused the prime minister of the mixed messages regarding the NHS Covid-19 app and said: "When it comes to creating confusion, the prime minister is a super-spreader.” Starmer had to isolate himself following one of his children being tested positive.

According to the figures from the ONS, around 9 in 10 adults in all parts of the UK could possibly have Covid-19 antibodies with the estimates ranging from 88.6% in Scotland to 92.6% in Wales, 90.0% for Northern Ireland and 91.9% for England.

Brexit and Covid-19: How will the pound fair?

It simply depends on improved market sentiment and the management of the Covid-19 Delta variant. The near-term outlook for Sterling will be determined by concerns regarding the Delta variant and whether investors have fully priced in the news.  If they have done so, then possibly the currency and market sentiment will improve. 

Brexit remains a threat to the currency too, as the UK and EU could find themselves at the opposite end of the table over the Northern Ireland question. On Wednesday, the UK announced its intention to renegotiate certain points included in the Northern Ireland protocol, and argued that in its current form it will create problems for trading goods between Great Britain and Northern Ireland. The release of the command paper outlining the UK government proposals about how the Protocol should be changed poses a major challenge to the EU.  This move could potentially hurt the pound, according to analysts. However, they believe that this could become a more serious concern as we move closer to 1 October with potential legal battles and EU threatening the UK with the imposition of trade sanctions.

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Brexit is back in the picture, as there are talks of a potential trade war between the UK and EU over the coming days after both sides failed to reach agreement on the Northern Ireland protocol. The EU has threatened to impose sanctions on UK exports to Northern Ireland if it fails to implement the terms of the Northern Ireland protocol next month. If things escalate, the pound will also be affected, as it usually falls when concerns around Brexit rise.

EU press conference

On Wednesday, UK and EU officials met in an attempt to resolve any disputes over trade rules for Northern Ireland. In the EU press conference following talks with Lord Frost on Northern Ireland protocol, Maroš Šefčovič, the vice-president of the European Commission who serves as the EU’s lead on post-Brexit negotiations with the UK, said that fundamental gaps remained in the UK’s implementation of the deal. On the Northern Ireland protocol, both sides agreed in 2019 this was the best solution to protect the Good Friday agreement. In December last year some solutions were agreed, including grace periods and exemptions in areas where the UK was not ready to implement the protocol. But he highlighted that “we cannot undo the core of the protocol”, as there are still “numerous and fundamental gaps” in the UK’s implementation of the deal.

He also confirmed that the EU could take retaliatory action. Šefčovič says the EU is a peace project, and, as he said, he did not arrive with a list as he is looking for a solution. But he did confirm that the EU could impose tariffs on some UK goods if the Northern Ireland protocol was not implemented. The protocol is designed to prevent checks at the border with Ireland. So, the EU agreed to let the UK conduct these checks at the GB/NI border. The easiest thing would be for the UK to accept EU SPS standards. Nonetheless, Šefčovič says he has a good and honest relationship with Frost and believes in Frost’s “best intentions”.

How will the pound react?

If the relationship with Brussels breaks this could weigh on Sterling sentiment in the short-term. If the EU does take any retaliatory action, and tensions escalate, then the possibility of the UK losing access to the single market would raise significant risks for the UK economy and hurt the pound.

The Prime Minister’s spokesman said: "The protocol was formed in a spirit of compromise, in challenging circumstances. It was not a finished solution... and we didn't expect the EU to take such a purist approach to it. We are working very hard to resolve these issues consensually. But the Prime Minister has always made clear we will consider all our options in meeting our responsibility to sustain peace and prosperity in Northern Ireland.”

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The British pound fell against the euro and US dollar, after the remarkable recovery it enjoyed during the first three months of the year. With the euphoria about the UK’s successful vaccination programme starting to wear off and a wider demand for the euro, the Sterling outlook is not looking as promising.

The pound performed very well against the euro in the opening quarter of 2021, but since February’s highs, it has dropped, suggesting that the Eurozone is performing comparatively better as the European coronavirus vaccination rates have increased. For many economists, further gains for the pound might prove to be difficult as most of the good news has already been priced in.

Bright Outlook for the Pound might be threatened

The UK economy managed to recover after a difficult 2020, as economists grew optimistic after the successful and rapid vaccine rollouts and the easing of the lockdown restrictions. The economy is expected to expand 5% this year, something that has boosted the pound the first quarter. The reopening of the economy has been now priced in, while the sell-off in UK government bonds, pushed yields higher and supported the pound. However, economists are questioning about how much higher the pound could possibly go. Foreign exchange analysts are warning that the UK is in a more difficult position than other economies due to the fact it was severely affected by the Covid-19 crisis earlier on, despite economic momentum accelerating. Additionally, there are worries about the potential impact of Brexit, with exports and imports with the EU having fallen dramatically in January.

The pound will find support if the UK manages to continue attracting investments such as cross-border mergers and acquisitions which are a significant part of the conditions required for continued growth.

Pound sensitive to BoE Andy Haldane’s departure

News that the Bank of England Chief Economist Andy Haldane would be leaving the Bank's Monetary Policy Committee has also affected the pound. One of the reasons was that Haldane was a hawk on the MPC, supporting higher interest rates and being optimistic about the UK economy. A hawkish central bank is linked to a solid and strong currency, and as such his departure was interpreted as a crucial factor in the pound’s weakness. His views on the economy were seen as vital for boosting the pound in February.

With Haldane leaving, the MPC may now react to any forthcoming inflation risks a little later, but markets will need to wait and see who the new chief economist will be and reassess the new policy changes. For other economists, Haldane’s departure might not have a long-lasting effect on Sterling as there weren’t any plans of tightening the BoE policy in the coming months anyway.

The recent declines of the pound might also be short-lived as some economists expect the pound to continue its outperformance, particularly against the Euro.

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The possibility of the Bank of England pushing interest rates into negative territory has been hinted at by a member of the BoE’s Monetary Policy Committee. If interest rates go lower, it is expected that the pound will be negatively impacted in the next few months. The decision to use negative interest rates is considered by the bank as positive in regard to offering further support to a struggling economy.

MPC member Silvana Tenreyro said in an online speech that negative interest rates will boost UK growth and inflation. "Cutting Bank Rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus," Tenreyro noted. Tenreyro said the Bank of England has been in contact with financial services firms discussing the potential impact of negative interest rates. She said: "Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time."

How has the pound performed in 2021?

The pound has not enjoyed a good start to the new year, as it dropped against the euro and the dollar. The fact that the UK and EU reached an agreement on Christmas Eve has not made the situation better either, despite the hopes of some economists. Additionally, they are increasing concerns about the economy due to the stricter lockdowns. This has raised expectations of a further interest rate cut by the BoE.

The possibility of lower interest rates will also make UK money markets less attractive, turning investors away from the pound and towards other investments.

What do analysts and traders say?

Analysts expect that the upcoming Bank of England meeting on 4th February will garner a lot of attention, and as we get closer to it there will be growing speculation on the possibility of an interest rate cut.  

The pandemic has not helped either, as many economists believe that it has dampened sentiment towards Sterling and resulted in concerns about a slower economic recovery and a more cautious Bank of England. At the same time, other analysts disagree and do not expect an interest rate cut this February. Robert Wood, UK Economist at Bank of America said: "We do not expect the BoE to cut Bank Rate in February. Banks do not seem ready and some rate setters argue negative rates could be counterproductive when GDP is falling.” If this happens then the pound may rise.

With the pandemic and ongoing vaccinations, it is not yet clear how the UK economy will fair. Nonetheless, the UK government is committed to delivering CovidD-19 vaccines to the most vulnerable categories by mid-February. If everything goes as planned, and people are successfully vaccinated, then the BoE might reassess its plans and reconsider whether cutting interest rates is the best possible solution. If the economy shows signs of recovery, then the pound will respond favourably.

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You might have organised buying your home overseas a long time ago, but when it comes to Brexit there are a few things to consider before moving overseas. The requirements for living in France after Brexit have not been set in stone yet, with the latest updates referring to minimum resources. There is also some confusion regarding British expats’ French residency rights, healthcare and work in France after Brexit. In this article we hope to shed some light on some of these and to help guide you through the issues that most Brits are concerned with.

Minimum Resources Requirement

Many Brits are concerned about the number of resources they need to have to qualify for French residency after Brexit, especially for those who have limited income or are pensioners, which can be quite stressful.

The French government has recently published an Arrêté in the Journal Officiel, which clarifies what criteria officials need to consider when making their decisions. Such decisions will be based on individual cases, as the authorities will need to look at an individual’s specific situation, whether they own their home, paying mortgage or rent, or they have extra savings or rental income in the UK.

The French government will consider reasonable income anything that is in line with the French in-work benefit, the so-called Revenue de Solidarité Active (RSA) which is currently at €564.78 per month. For British couples for example, it will be fine if they both declare the aforementioned amount as their household income, without needing to receive €564.78 each. Regardless of how many people are residing in a specific household, the amount required will be the same as the minimum amount of the RSA for a single person without children. The same amount will also be the guideline figure for other applications such as those regarding the French benefit level for pensioners.

French Residency: Providing proof of your income

Not everyone has to provide proof of their financial situation when applying for residency. If you have lived in France for more than five years, you will only need to provide personal identity confirmation documents, proof of address documents and evidence of the date you arrived in France.

If you have been living in France for longer than 5 years or you are married to a French citizen, you will still need to apply for a residency card before 30th June 2021. If you lived less than 5 years in France, you would need to apply as either employed or self-employed, job-seeker, student, retired or as the family member of someone who meets the above criteria or the spouse, civil partner or live-in partner of a French person. If you are retired or financially inactive, then you will have to provide evidence of how you support yourself including recent tax declaration, any pension payments or recent bank statements. A French government website in both English and French provides more information about moving to or living in France.

Transferring Funds: Currency Exchange

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The possibility of striking a Brexit deal before the weekend has helped to stabilise the pound as it recovered some ground, on Thursday. However, tensions are building ahead of the weekend as talks continue. This means that any Brexit-related headlines will create pound volatility and move the market considerably.

The clock is ticking

While markets are hopeful that a deal will be reached, the fact that the clock is now ticking with little space for manoeuvres means that the pound will remain sensitive. The Telegraph reported that Barnier told EU ambassadors that the UK has become more flexible and lowered its demands in regard to UK waters post-Brexit, demonstrating that the two sides are closer to an agreement. Fisheries and governance remain unresolved, with the latter to be negotiated once all other agreements are settled. Talks could now focus on the percentages involved in fisheries, but France might prove to be uncompromising on its fishing demands. According to The Telegraph, "Fishing nations such as France, Denmark, the Netherlands, Belgium and Spain fear Mr Barnier may cave too easily to British demands as talks enter their endgame. Paris insists the UK red line of annual fishing negotiations is unacceptable.” France has already clarified that it will veto any deal that goes against their interests.

A report in The Times said that "France and other hard-line countries are pushing for no deal in Brexit talks to soften up Britain before a reset in negotiations next year, unless the government makes significant concessions in the coming days," and unless the UK "backs down over the next 48 hours", a period of 'no deal' will "bring a chastened Britain back to the table next year".

The BBC's Europe Editor Katya Adler said that Brussels believe a deal will be possible in the event that the UK makes significant steps to meet the demands regarding fisheries, competition rules and governance.

Talks continue in London

Negotiations are at the final stages, but it appears that any last hurdles will require, maybe not divine intervention, but at least some help from leaders from the UK, EU Commission and France. Both Wednesday and Thursday, saw negotiators working well into the night for the final push.

On Friday, The Telegraph reported that talks will find Boris Johnson and Emmanuel Macron coming head to head this weekend, with France interested in securing access to fish in British waters.

According to certain sources, Macron's officials have been "lobbying hard" among different member states to agree to added demands on fishing, state subsidies and non-regression clauses, and these will be discussed by both the PM and the French president over the weekend.

EU member states could also veto any deal as they continue to have concerns about state aid mechanisms and how to enforce agreed environmental and labour standards. France and Denmark are reluctant to lose their fishing shares in UK waters.

Indeed, there is not much time left now, as negotiations continue and the upcoming EU leaders’ meeting on 10 and 11 December 10-11 means that a final deal needs to be ready to be agreed. Sterling will make significant gains if a deal is announced in the coming weeks and it could potentially continue to rise.

 

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The pound appears to have risen ahead of the weekend, as Brexit negotiations continue. EU ambassadors have been told that a trade and security agreement with Britain is almost ready to be finalised as gaps on the contentious issues are “slowly shrinking.”

Both sides however remain inflexible, with European politicians saying that there remains work to be done and the UK saying that the EU needs to compromise. The risk of a no-deal Brexit in six weeks is still high.

According to a Bloomberg article, the UK “hasn’t moved sufficiently to overcome the main obstacles to a post-Brexit trade deal as three of the bloc’s leaders called for contingency plans to be stepped up in case there is no agreement.” Secretary General of the Commission Ilze Juhansone told envoys from the EU’s 27 member states on Friday that “negotiations could now slip into December as progress has been slow.”

On the other hand, the report noted that "The U.K. government has said that both sides have already made concessions on the three remaining areas of disagreement - access to British fishing waters, the level playing field for business, and how any deal is enforced - but that it’s up to the EU to make the final compromises."

A report on Reuters, stated that EU diplomats reported that “The European Union and Britain remain at odds in last-ditch trade talks over fishing rights, guarantees of fair competition and ways to solve future disputes, even though they are very close to agreement on other issues.” A senior EU diplomat told Reuters that “We are both close and far away. It seems that we are very close to agreement on most issues but differences on the three contentious issues persist.” Officials will continue negotiations online, as on Thursday it was announced that direct talks were suspended after a member of the EU team tested positive for COVID-19.

Negotiations are stuck

Negotiations have not progressed much as both sides remain unyielding on the main points: “Some things on the level playing field have moved, albeit very, very slowly. Fisheries are not really moving anywhere right now.” In terms of state aid, Britain has offered to set up a regulator for corporate subsidies, as the EU requested, but this was rejected as the body needed to be independent from the government and with a clear authority. Another EU official said that “negotiators mostly focused on such elements of corporate fair play as well as divvying up fishing quotas in recent days: ‘Both of these are still very stuck.’”

Pound Rises despite Brexit deadlock

The pound has risen against the Euro, Dollar and other major currencies, as negotiations continue. Markets remain confident that both sides will strike a deal despite the persistence of major differences. In the possibility of a trade agreement being reached the next two to three weeks, the EUR is expected to fall, something that will also be supported by positive news about a vaccine for Covid-19.

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A weak US dollar and rising hopes for a trade deal between the European Union and Britain helped Sterling rise on Tuesday afternoon.

Analysts are now saying that the pound could rise further in the event of a post-Brexit trade deal. This, of course, is something we have seen every time that there was any positive news pointing to a breakthrough to the negotiations. Sterling fell immediately after the UK referendum vote to leave the EU in June 2016, as political uncertainty hurt the pound. Since then, Sterling has been volatile every time news was released regarding Brexit and has fallen on news of a stalemate in the negotiations or disappointing updates from both sides. As we are nearing the end of the Brexit transition period, and the possibility of an agreement appears more certain, the pound will most possibly react positively and rise.

A possible agreement by mid-November will support the pound

Optimism regarding the trade talks has risen recently after the EU’s negotiating team and Michel Barnier the EU’s chief Brexit negotiator said that they will resume talks in London until Wednesday 28 October and many reports have noted that an agreement could be reached by Saturday, 31st October 31.

Any time from now until the middle of November, when a possible deal might be reached, Sterling could strengthen as long as the two sides ensure that a no deal scenario is not in the cards.

By reaching an agreement, both sides will provide certainty to businesses and investors, eliminating uncertainty, restoring sentiment and offering relief to the pound.

USD weakness to support the pound

For many analysts, the pound might rise, but this might not be a sharp rise and it will only be the result of a depreciation of the USD. At the same time, they predict that a strategic buying of Sterling in anticipation of a deal being reached might be possible, but this will be short-term.

According to Pound Sterling Live, Rabobank see potential for the GBP/EUR exchange rate to rise if a Brexit deal is announced, but such a rise will be limited.  Jane Foley, Senior FX Strategist at Rabobank said: "We don’t expect that relief at the end of the Brexit process will be sufficient to divert attention away from a poor set of UK fundamentals," she adds.

"If we are wrong on the market’s assigned relative probabilities, then Sterling will move more or less than we expect. Given the better mood music of recent weeks, risks appear skewed in favour of a smaller move,” Paul Robson, Head of G10 FX Strategy EMEA at Natwest Markets said. But they also highlighted the issues lying ahead, including that of companies having to adjust to the new realities after Brexit and the potential disruptions in various sectors, including the auto industry that were recently highlighted by the automobile sector.

Potential threats ahead

Economists are emphasising the fact that Brexit will not only disrupt various industries and create uncertainty about the future of businesses, but it will add to the UK’s existing problems. The economy is currently hit by Covid-19, government finances are deteriorating, and lockdown restrictions are hurting the economy further. With a weak economy and limited investment flows, the pound might have a rocky road ahead, with or without a Brexit trade deal.

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European automobile manufacturers have called on the EU to take a softer stance regarding the UK’s future market access, and they warned that the bloc’s harsh position could have long-term effects on the automobile industry. In June, more than 50 European and British food and drink trade associations wrote to Brussels to request for more flexibility, underlying the fact that a tariff-free trade agreement needed to be coupled with the assurance that businesses will be able to benefit from it.

Why does the manufacturing sector worry?

For UK and EU importers and exporters, it is important to maintain a frictionless access to the single market. Manufacturing businesses are aware of the damaging effects of Brexit and the ensuing disruptions to their sector. Brexit-related uncertainty has made it very difficult for most sectors to prepare for a post-Brexit business environment and reduced the possibility of securing investment.

UK manufacturing is integrated into the EU single market, as almost half of all UK goods imports and exports are with the EU. Many UK manufacturers are dependent on frictionless trade with the EU so their supply chains are not interrupted. With the possibility of a no deal Brexit, manufacturing sectors are concerned about a potential lack of regulatory alignment with the EU as no business wants to lose the privilege of free trade.  According to independent research from the UK in a Changing Europe initiative, some sectors, such as automotive, could be severely affected if they have to pay tariffs to export cars to the EU in the absence of any agreement with the EU. As they warned, “In almost all cases, Brexit will create additional financial or other cost burdens for companies: tariffs, customs declarations, certification costs, audits to ensure rules of origin compliance, loss of collaboration opportunities in R&D, border delays, EU customers switching to other suppliers, visa costs for EU workers, and so on.”

Letter from the European Automobile Manufacturers’ Association (ACEA)

In a letter from the European Automobile Manufacturers’ Association (ACEA) last week, the association which represents  some of the biggest car manufacturers in the world, including BMW, Toyota and Fiat, warned Brussels that some aspects of the bloc's current stance are "not in the long-term interests of the EU automotive industry.” The ACEA urged the EU to "reconsider its position" on tariff-free trade. In its letter, sent last Thursday, 15th October, the ACEA requested from the EU to reduce the percentage of car components manufactured in Europe or Britain so that the businesses can benefit from any EU-UK trade deal. The car manufacturers are urging that the new rules be introduced slowly so that the automobile industry has the time to prepare and adjust for the new rules and environment. For EU manufacturers, an agreement that provides tariff-free, quota-free trade on all goods is crucial.

EU chief negotiator Michel Barnier has told businesses that “short-term adaptation costs” were necessary to protect “long-term economic interests.”

Nicolas Peter, BMW’s finance director, has said in a press conference last week: "The European Automobile Manufacturers Association (ACEA) has estimated that it could cost car manufacturers and suppliers from 10 to 11 billion euros, so we need tariff-free trade. And even then, it must be seamless. We have a just-in-time production system, so customs administrative processing must be efficient."

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Pound volatility is expected to be high today and on Monday as the markets await Prime Minister Boris Johnson’s decision on whether the UK stays or leaves the Brexit negotiating table.

In the meantime, England is dealing with the rise of new Covid-19 cases and restrictions which will come into force under the government’s new three-tier system with London facing tighter restrictions from midnight on Friday.

Under this generalised gloomy climate, investors are waiting to hear whether the UK will continue with the Brexit talks. Last month, Johnson had set a deadline for a possible deal for the 15th October, and said that if nothing had been agreed, both sides should “accept that and move on.”

At a Brussels summit on Thursday, the EU proposed “two to three weeks” of negotiations. Investors are now closely watching to see whether the PM will try and resume the negotiations or stick to his threats and walk away.

Brexit pessimism pushed the pound lower against the US dollar, while it remained flat against the euro. At the same time, the prospect of tighter lockdown restrictions could further hurt the pound and threaten economic recovery. Jasper Lawler, head of research at LCG, said that more lockdown measures could push the UK and European economies into a deep recession: “The British government is under pressure to follow scientific advice for a 2-week circuit breaker national lockdown but has so far resisted, but has raised the capital to the Level 2 tier of restrictions. That means two different families can no longer mix indoors- be that in their home or in a pub or restaurant. There is still no sign of the joint European recovery fund so in the meantime economies stand to take the hit – risking a double dip recession – from the new restrictions.”

Angela Merkel urges Boris Johnson to keep negotiating over Brexit

The German chancellor has urged Boris Johnson to continue and not to walk out of the trade and security negotiations. In her comments that were designed to calm the atmosphere, Merkel said that both sides needed to find common ground: “In some places things have moved well, in other places there is still a lot of work to be done. We have asked the United Kingdom to remain open to compromise, so that an agreement can be reached. This of course means that we, too, will need to make compromises.” Her comments also come after Thursday’s summit where French president, Emmanuel Macron, demanded that the UK accept the bloc’s conditions or face a no-deal exit.

The EU had proposed a further “two to three weeks” of negotiations as the EU’s chief negotiator, Michel Barnier is scheduled to be in London on Monday to continue negotiations. Like Merkel, Barnier also said that the EU wants to give every chance to the negotiations so they are successful: “We’re available, we shall remain available until the last possible day.”

The UK’s chief negotiator, David Frost, expressed his disappointment after Thursday’s summit and tweeted: “Disappointed by the conclusions on UK/EU negotiations. Surprised EU is no longer committed to working ‘intensively’ to reach a future partnership as agreed with [the European commission president, Ursula von der Leyen] on 3 October. Also surprised by suggestion that to get an agreement all future moves must come from UK. It’s an unusual approach to conducting a negotiation.”

The foreign secretary, Dominic Raab, said that a deal was still possible: “We’ve been told that it must be the UK that makes all of the compromises in the days ahead, that can’t be right in a negotiation, so we’re surprised by that, but the prime minister will be saying more on this later today. Having said that, we are close [to a deal]. With goodwill on both sides we can get there.”

While challenges remain when it comes to the Brexit negotiations with the level playing field, fisheries, and governance, still unresolved, many are positive that there could be an agreement if significant work is done.

Are you Transferring funds abroad?

If you are concerned about a no-deal Brexit, and the British currency remaining sensitive to Brexit uncertainty, you should get professional assistance when transferring funds abroad. Get in touch with Universal Partners FX to find out about efficient risk management and tailored solutions.