France’s 48-hour Brexit Ultimatum scares pound sterling, wipes out all November gains against euro

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– Barnier warned by France not to give in too much to the United Kingdom
– GBP falls sharply, stabilizes until Thursday
– Intraday volatility is expected to increase
– But expect significant movements to be attenuated

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The pound has fallen sharply in the past 24 hours as investors grow increasingly nervous about the state of post-Brexit trade talks, amid reports that French officials want the EU to say that negotiations collapsed unless the UK accepts the EU’s demands within 48 hours. .

However, the pound’s decline appears to be relatively contained by some analysts who say rising tensions between the two sides are to be expected at this point and a deal will eventually emerge.

Negotiations are usually the most tense before their final conclusion, as was the case with the negotiations for the EU Withdrawal Agreement.

“Last minute Brexit nervousness pushed GBP / USD back below the key pivot of 1.34, but we continue to see this as part of the trading process. We continue to expect a deal, but not until the 11th hour. It appears to be the case. an hour or two more for the Brexit process to unfold on its own schedule – not the forex market. We remain sellers of GBP on a possible deal announcement, but unstable market conditions may dominate first, ”says Mark McCormick, Global Head of FX Strategy at TD Securities.

A headline Thursday from the Daily mail said a deal could be reached today, following intensive discussions overnight in London.

Irish Foreign Minister Simon Coveney reportedly said on Thursday morning that a deal could be reached in the coming days.

The pound fell against the euro, dollar and other major currencies following briefings by European politicians on Wednesday, which suggested that without some material concessions from the UK, negotiations would likely fail.

EU chief negotiator Michel Barnier said “the talks are at stake”, while Frenchman Emmanuel Macron told media in Paris he was closely monitoring Brexit trade talks and would not sign. nothing that would go against the long-term interests of France.

“France is pushing for a no-deal Brexit if Britain does not budge,” headlines Times this seems to have added to a feeling of nervousness among traders positioned for a stronger pound.

“France and other extremist countries are pushing for no deal in Brexit negotiations to soften Britain before a negotiation reset next year, unless the government will not make any significant concessions in the coming days, ”the report said. “Extremists” have suggested that unless the UK “backs off in the next 48 hours,” the EU should declare negotiations failed and allow the economic pain of a short period of “no- agreement “to” bring a suppressed Britain back to the table. next year “.

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“We had previously warned that the pound is becoming particularly sensitive to negative Brexit headlines, as markets have more or less discounted that a deal will be traded forward,” said Mathias Van der Jeugt, analyst at KBC Markets in Brussels. “The UK Times reported that countries including France were increasing pressure on Britain, saying that unless the UK compromises within the next 48 hours, the EU should declare that negotiations have failed and prepare for no deal. ”

The Pound-Euro exchange rate fell to its lowest level since October at 1.1008 before gaining ground to close a substantial 0.75% drop at 1.1040, it is at 1.1050 on Thursday. The pound-dollar exchange rate was less impacted, however, content to reduce the strong gains of the previous day to finish 0.50% lower at 1.3360 where it was held at the time of publication.

“The weakness of the GBP may reflect a nervousness that, as previous Brexit deadlines have passed, time is really running out,” Daragh Maher, head of foreign exchange strategy, US told HSBC in New York, “but the working assumption still seems to be that a deal will be done shortly.”

While most analysts still believe a deal will be closed, some market participants are wary of a tactical error by one or both parties.

Political commentator and journalist Andrew Neil points out the risks of France’s 48-hour delay tactic:

“It might just be a last minute tactic. But if it is more than that, it is a serious miscalculation on the part of the EU. The UK will not hand over the cap. More likely to conclude that if a liberal country, a free market, a free trade economy, net zero support, with close military / security ties with Europe can only get a “punishment” deal with the ‘EU, then UK will go without a deal and make the most of it, no matter how painful in the short term. The UK will likely be defiant. And EU / UK relations will sit in the freezer for years to come. Not good. ”

the BBC Editor-in-Chief for Europe Katya Adler reports that Brussels strongly believes that the UK must now take significant action on the three outstanding issues of fisheries, competition rules and governance for a agreement be reached this year.

She also warns that EU countries are increasingly nervous about concessions the European Commission negotiating team might make to the EU.

“That’s the painful part,” an EU ambassador told Adler.

But the Telegraph reported on Thursday that Barnier told EU ambassadors on Thursday that the UK had already reduced its demands for a larger share of catches in UK waters after Brexit.

Barnier said the UK has signaled it could accept 60% of the value of UK Waters shares from January 1, up from the 80% the country initially resisted. Given France’s concerns that followed this briefing to EU ambassadors, this would suggest the country wants the UK to give more ground.

“Fishing nations like France, Denmark, the Netherlands, Belgium and Spain fear that Barnier will give in too easily to British demands as talks enter their final stages. Paris insists the British red line in annual fisheries negotiations is unacceptable, ”said James Crisp of the Telegraph. .

Movements in the pound over the past 24 hours suggest that the currency is entering a period of heightened volatility, during which rumors and unsubstantiated reports move the market.

“The pound fell from its three-month highs after the latest Brexit developments challenged the UK and the EU to reach a trade deal. With Brexit negotiations seen as close to a crucial end game, the pound could be exposed to increased risk of volatility in the years to come. hours and days, ”says Joe Manimbo, Senior Market Analyst at Western union.

However, only a final conclusion will trigger a more sustained movement, up or down, in the value of the currency and intraday movements will likely be muted.


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