The pound has regained its momentum since yesterday, after the positive news of new US Federal Reserve stimulus and the latest post-Brexit trade talks between the EU and the UK.

Sterling rose after Prime Minister Boris Johnson said yesterday that there is a "very good chance" a trade deal will be made with the EU. Both Johnson and the EU Commission President Ursula von Der Leyen agreed that there will not be an extension to the Brexit transition period, which will end on 31 December 2020. The pressure is now on both sides to agree on a post-Brexit trade deal, so the UK does not leave the bloc without a deal. If the UK leaves the bloc without a deal, then Britain will revert to World Trade Organisation terms, which will mean that the UK would have to pay high tariffs and quotas at a time when the country’s economy is dealing with the Covid-19 pandemic.

Fresh Momentum injected into the negotiations

According to Reuters, the hour-long video call on Monday between Johnson and the EU Commission’s von Der Leyen, “has injected fresh momentum” into the negotiations, as “people on both sides with knowledge of the conversation,” attested. The “EU inferred from Johnson’s contributions that he is willing to soften his position and European officials told him they are ready to do the same.” After the call, Johnson said: “I don’t think we are actually that far apart -- what we need to see now is a bit of oomph in the negotiations. The faster we can do this the better: we see no reason why you shouldn’t get that done in July.”

Obstacles Remain

Johnson’s latest communication with the EU comes after three months of trade talks which have ended in deadlock. However, things might not be completely resolved just yet, as EU Council President Charles Michel warned that the EU will not “buy a pig in a poke” as it was not in any hurry to reach an agreement. He said: “We won’t just speed up. We have to remain focused on content and consequences.” While the UK has been pushing to speed up the discussions, the EU wants to make reasonable steps, with the next discussions to resume on 29 June. Johnson explained that he is against the talks “going on until the autumn, winter, as perhaps some in Brussels would like.”

Both sides have failed to reach an agreement on a free-trade deal as well as find common ground when it comes to certain EU standards and demands regarding fishing rights and security which the UK believes are binding it to EU rules. Also, the UK continues to refuse to accept the power of the European Court of Justice to settle any disagreements between the two sides.

Pound Remains Unpredictable

With Brexit negotiations in the background, Paul Meggyesi, Head of FX Research at JP Morgan noted that the pound’s trajectory would remain unpredictable. He said: “GBP is liable to become ever-more idiosyncratic as the UK nears the business end of the entire Brexit process, the last six months of the transition period, with still a trade deal to be negotiated. This puts GBP at the mercy of unpredictable Brexit news flows, and investors should be prepared for potentially quite violent swings in GBP as the market tries to benchmark probabilities of the potential outcomes and eventually moves from valuing GBP on a probability-weighted basis to pricing a central scenario and then the eventual outcome itself.”

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