• Sterling has become a victim of the European Union chief negotiator’s verbal virtuosity.
  • The recent wave of optimism is likely temporary as hard issues of Irish border are still unresolved.

After many months of Brexit-related negativism on both sides, the European Union and the United Kingdom, finally there are some signs of optimism. The European Union chief Brexit negotiator Michel Barnier started last week on the negative side saying he opposes many issues of current Brexit deal strongly sending Sterling more than 200 pips lower from its August highs towards last week low of 1.2783.

The UK’s so-called Chequers proposal has been many times criticized by Barnier. He already made clear that the EU’s member states will not accept its central idea of giving the UK customs agreement enabling an independent trade policy while enjoying the benefits of frictionless trade, and a common rulebook on the agricultural and industrial goods. 

Many other parts of the Chequers proposals are though practical including foreign policy and security, with the UK having softened its position on the jurisdiction of the European court of justice.

The foreign exchange markets cheered Barnier’s sudden change in stance last Friday saying 90% of Brexit deal is done while he held talks with the Austrian Prime Minister Sebastian Kurz. Sterling suddenly appreciated to above 1.3000 level and should the US labor market report not see such a remarkable and unexpected wage growth in August (2.9% y/y), Sterling would have probably remained above that level. 

With Sterling falling back to lows around 1.2910 this Monday, the foreign exchange market fell once again prey of Barnier´s mood. While in Bled, Slovenia, Barnier said that if both sides are “realistic” the Brexit deal is achievable within 6-8 weeks, making it possible for the November 13 European summit to finalize the Brexit deal.

Of course, Sterling surged towards 1.3100 once again. Barnier wants Brexit deal this autumn on the issues of citizens rights, the divorce bill and, crucially, Northern Ireland border, among others.

Barnier’s sudden wave of optimism is striking given the fact that it is actually the first ever smiley phase of otherwise though Euro-pragmatic. While it is not yet known what kind of deal the UK is going to get, neither what kind of separation UK prefers, options are multiple. 

First, it is the Norway + option, with full alignment with EU laws, not only on goods but also services, and accepting that the UK needs a customs union.  The second option is a Canada-style free trade deal. Such agreement would please the Brexiters, but a hard work with Brussels finding a solution for avoiding a hard border on Irish border and that won't be easy.

So the recent wave of sudden optimism is unfounded and probably even politically motivated before the Brexit moods darken again with Barnier turning back to the old, European interests backing moods. And for Sterling, this is the dark side of Barnier’s mood. 

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