By Jamie Jemmeson ACSI, MSTA at Infinity International

UK/EU trade talks seem to be echoing a similar case of déjà vu as Brexit did. Looking back at the timeline we can see a similar scenario from former Prime Minister May’s “Brexit means Brexit” and “no deal is better than a bad deal” to current Prime Minister, Johnson’s “do or die” speech, pushing negotiation right to the limit.  This resulted in a transition deal following the UK’s exit of the EU on 31st January 2020.

By the end of the year, both sides need to find ways around their respective differences, reach an agreement and leave enough time to ratify as well as implement the deal in legal text. Looking at what needs to be agreed, the task ahead is enormous, below is a selection of some of the subject matters that need to be in the agreement:

  • free-trade agreement
  • fishing waters agreement
  • security co-operation
  • legal jurisdiction
  • financial sector alignment and
  • Northern Ireland border complications

It cannot be ignored that the COVID-19 pandemic has complicated an already tense process. Leaders have been focused on the pandemic as they manage both the economic, health and social fallout. Brexit talks were reduced to video conferences, reducing the opportunity for rapport building often critical to diplomacy.

The deadline to extend the the transitional agreement beyond December, expires at the end of June. The UK has rejected the prospect of an extension and has made clear. Unlike other targets, this was self-imposed as it was written into the transition agreement.

So, what happens now, is a deal still possible?

As it stands, the UK is officially out of the EU, but continues to follow EU rules until December 31, 2020. So now the two sides are moving towards a deadline at the end of the year to reach a deal. PM Johnson and European Commission President Ursula von der Leyen met with other top EU figures in the middle of June with both sides stating that “new momentum” is required to reach a deal. It was agreed to intensify talks through the summer.

In comparison to the first phase of Brexit, where the deadlines kept getting kicked down the road, moving the target is a little less likely here. The December 2020 deadline is written into the Brexit deal, which is now an international treaty making it harder to adjust.

In short, a deal is still possible, but it will be tough. History has shown that agreements have been made at the last minute on several occasions; we have seen this on several instances for Brexit. A hard deadline may add to the urgency of the negotiations.

What does this mean for Sterling?

It is entirely possible Sterling is set for volatility during the second half of the year.

This 6-month forecast at the start of June highlights the potential scenarios for Sterling:

The above forecast was compiled using data taken from over 40 financial institutions in an effort to predict the high, low and mean forecasts for the next 6 months: covering the phase of negotiations between the UK and EU and the impact of COVID-19.

As can be seen, there are large differentials between the high and lows which highlight the potential volatility that could happen during this period as we ride ebbs and flows of progress and setbacks in the forthcoming talks.

Sterling’s volatility is compounded by three factors, global COVID-19 sentiment, Brexit trade talks and BoE policy. It is worth noting that in the 4 years since the EU referendum we have seen Sterling trade in a large range (circa 36 cents against the US Dollar and 26 cents against the Euro). With the fallout of COVID-19 still unknown, the impacts could be felt harder by some businesses.

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This blog post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. IIFX is a company registered in England with registered number 06333730 and registered address at Third Floor, 24 Chiswell Street, London, United Kingdom, EC1Y 4YX. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).