The pound has been experiencing its ups and downs but was knocked down on Thursday morning due to a statement by the DUP. After it had reached four and five-month highs against both the dollar and the euro in a week that was filled with expectation for a deal, Thursday morning’s setback wiped away most of yesterday’s gains. However, if a deal is announced, it is expected to rise again.

Brexit deal and the pound

Talking to BBC Radio 5 Live's Wake Up To Money, Neil McDonnell, chief executive, ISME, representing over 10,000 small and medium sized Irish business, said that positive news in regard to the deal will be good news for the pound, and for the Irish economy too. He said: "For business people, what you don’t want is an enormously complex or administration heavy transaction. One of the industries that have been most badly affected by Brexit has been the mushroom sector because of the decline in sterling. ‘Good news’ out these latest talks might help sterling bounce. Any appreciation in sterling would make things considerably better for people on this side of the border."

Talking on the same show, James Bevan, chief investment officer at CCLA Investment Management, added: "[There's] a general expectation that Mr Johnson will secure a deal with the EU so the currency markets have been relatively strong…. Let me be very clear, the pound is undervalued if there is a deal.” But it could hit parity with the dollar in the absence of no deal.

DUP concerns

The DUP’s statement from Arlene Foster and Nigel Dodds said that “as things stand, we could not support what is being suggested on customs and consent issues and there is a lack of clarity on VAT. We will continue to work with the Government to try and get a sensible deal that works for Northern Ireland and protects the economic and constitutional integrity of the United Kingdom.”

The statement clarifies that the DUP is unable to accept the deal as it stands but remains open to discussions. This could mean that the ball is now in the EU’s court and that Michel Barnier would need to compromise on the customs arrangements, consent and the issue of VAT.

What could happen now?

It is possible that the Prime Minister Boris Johnson proceeds to offer more concessions, but this is unclear and could possibly destroy the possibility of a deal.

But, it could also lead to the EU compromising. This is also a complex possibility as the issue of borders is a significant obstacle, and the EU is concerned with protecting the single market from the movement of rogue goods. Without border checks this is not a viable alternative.

A third possibility would be a change from the DUP itself. They have already stated: “We will continue to work with the government to try and get a sensible deal that works for Northern Ireland and protects the economic and constitutional integrity of the United Kingdom”. So, there may be changes.

Pound and headlines

Volatility will continue as headlines will affect the price of the pound, with further changes through the course of the day. With ongoing negotiations between the EU and UK, and the EU summit commencing on Thursday, markets will be vigilant awaiting confirmation that the two sides have reached an agreement.

According to Quek Ser Leang, a currency market analyst quoted on Pound Sterling, "While the current rally is overbought, it is too early to expect a sustained pull-back. There is still room for further GBP strength but the pace of any advance is likely to be slower.”

Analyst Kim Mundy, with Commonwealth Bank of Australia, also agrees that a deal could boost the pound: "The EU’s leader’s Summit begins today. Market participants are waiting for confirmation (or otherwise) that the EU and the UK have reached a new Withdrawal Agreement. News of an EU‑UK deal today could see GBP/USD hit a fresh five‑month high above 1.3000."

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With the EU asking for more concessions from the UK, the pound fell against both the dollar and the euro. Despite optimism that Britain and the European Union will be able to come to an agreement and strike a Brexit deal this week, the pound was hurt by the realisation that there’s still a long way to go.

On Monday, the PM's official spokesman told journalists that "Talks remain constructive, but there is a lot of work still to do." Similar were also the comments by Ireland's Tanaiste (deputy prime minister) Simon Coveney: "A deal is possible, and it's possible this month," Mr Coveney said. "It may even be possible this week. But we're not there yet."

Last week, Sterling rose higher on the possibility of the UK and EU finding common ground. However, the outlook is now more measured and expectations on Brexit negotiations are constrained, something that has helped to pull Sterling back down. With EU leaders fearing that Johnson will not manage to pass Brexit in Parliament, uncertainty will remain.

Getting Brexit done

In the meantime, in Brussels, both sides are trying to reach a Brexit deal before Thursday's summit of European leaders, despite the "big gaps" as senior EU official Michel Barnier called the existing differences between the UK government and EU. 

On Thursday (17 October), the two-day summit of EU leaders will begin in Brussels and is the last meeting scheduled before the Brexit deadline. On Saturday (19 October), there will be a special sitting of Parliament. In case there’s no Brexit deal approved by MPs and no agreement about the UK leaving with no-deal, Saturday will also be the day that the PM will have to ask the EU for a delay to Brexit under the Benn Act.

Both sides are willing to agree a deal before the EU summit on Thursday and Friday, and, hopefully, that will enable the government to introduce a withdrawal agreement bill to be voted in a special Parliamentary session next Saturday. However, many remain pessimistic, including EU officials, with one senior figure describing the possibility of reaching a deal at the summit "ambitious." According to Tony Connelly, Europe Editor for Irish state broadcaster RTÉ, "Following two days of intensive talks the two sides are still far apart on customs. The EU side continues to have grave concerns about the UK proposals to keep NI in the UK customs territory, with Theresa May's old Customs Partnership idea being recycled and adapted for NI.”

Before the European Council summit starting on Thursday, markets will be waiting to see the developments before commenting on the pound’s future. Markets remain hopeful as long as there are ongoing talks. However, both sides would need to come to an agreement on the issue of the Irish backstop, ideally avoiding a hard border with Ireland. 

According to The Times, EU negotiators have requested more concessions from the UK, with the EU’s Chief Brexit negotiator Michel Barnier, describing Britain’s proposals unacceptable. Barnier told David Frost, Britain’s chief negotiator, that “Mr Johnson would have to give further ground on a customs agreement for Northern Ireland,” if a deal were to be struck.

Boris Johnson needs more backing for Brexit deal

In order to pass a new Brexit deal through parliament Boris Johnson will need support from both Eurosceptics and pro-deal Labour MPs. He will need to win over all the 28 Tory “Spartans”, as well as get help from the DUP or Labour backbenchers.

In a loyal address after the Queens speech on Monday, Lee Rowley, a Conservative MP expressed his position on Brexit and how it was necessary to get it done: “If there is light at the end of the tunnel later this week, and heaven knows I hope there will be, we have a fundamental responsibility in this place to try and resolve this most vexed of problems and allow our despairing country to move on. For the health of our democracy and to restore faith in this most venerable of institutions, in my view we simply must get Brexit done.”

Eurosceptic Steve Baker, was positive of a deal as he said, “Boris has had a dramatic shift towards a free trade agreement that would leave us a self-governing nation … So now really, the devil is in the detail … I am really looking forward to being able to vote for a tolerable deal but, until we get the text, I cannot tell you what we are going to do.”

Others expect to see more in order to vote for a deal, including reassurances on Northern Ireland, workers’ rights and environmental protections.

Whether a deal is possible, it will be obvious within the next few days. The government will have to table a motion by Wednesday if it wants MPs to debate an agreement on the Saturday sitting. If the UK agrees to make concessions to the EU, there is the risk of the deal not passing through the House of Commons with the DUP and Brexit hardliners not supporting it.  

It is within this context, that foreign exchange analysts are not hopeful that a deal could easily pass in the House, something that will lead to another Brexit extension and a snap General Election.

Markets are now cautious as they await proof that the new Brexit deal can pass Parliament before bidding Sterling to rise higher.

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