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Brexit returns as major headache for the pound

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The fading prospect of an extension to the post-Brexit transition period, and the risk of supply chain disruption at the start of 2021, casts a cloud over the GBP outlook.

Brexit is back in the spotlight this week as the UK and EU sit down for another round of virtual talks. But there’s little to suggest we should expect any real progress, and that’s one reason why we’ve seen some risk premium creep back into the pound. So are markets right to be worried?

Well, with both sides trading accusations that the other is being unreasonable, it is tempting to conclude that the chances of a free-trade agreement (FTA) being agreed this year are fading. But it’s worth remembering that meaningful progress was always unlikely until the autumn.

The last-minute pivot by the UK last October to agree on the withdrawal agreement is a good reminder that movement can come late in the day.

The message here is that we shouldn’t write off a wider free-trade agreement being struck just yet.

And amid all the hawkish language being used by both sides, there are some – admittedly pretty subtle – glimmers of optimism. Fishing, an issue that cuts deep into the Brexit debate, is going to be discussed quite a bit in this round of talks. We shouldn’t be expecting any swift progress here, but the EU is open to some movement from its ‘maximalist’ initial position on fishing.

The UK too may also be inclined to ultimately compromise on fishing. After all Britain exports most of the fish it catches, and imports most of what it eats. Failure to strike a deal could see steep tariffs placed on fish, enough to cause significant damage to the industry. 

The message here is that we shouldn’t write off a wider free-trade agreement being struck just yet. It will probably boil down to whether the UK is prepared to accept at least some alignment to EU state aid rules – an issue that has been thrown into sharper focus as the UK government responds to the economic impact of coronavirus. 




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