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.
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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