Building Brexit tensions to deliver a setback for the pound – MUFG

The pound has underperformed with EUR/GBP rising further above last week’s low of 0.8866 and cable further below last week’s high of 1.3482. In the meantime, Brexit talks are set to heat up posing downside risks for the pound, according to MUFG Bank.

Key quotes

“Recent price action signals that the pound has put a near-term top in place. The correction lower for the pound has been reinforced by the release of more negative Brexit headlines. It has been reported that the UK is stepping up preparations for Brexit trade talks to fail. PM Boris Johnson will reportedly tell the EU today that he’s willing to walk away rather than compromise on what he sees as the core principles of Brexit, and setting a deadline of 15th October for a deal.”

“UK officials are reportedly drafting ‘The Internal Market Bill’ which is expected to be published on Wednesday that is designed to dilute the power of the Brexit withdrawal agreement on issues including state aid and customs in Northern Ireland. While the bill is only intended as a fall back option in case talks fail, it risks further undermining negotiations on the free trade deal.” 

“The UK government appears to be hardening its negotiating stance ahead of this week’s crunch talks which makes it even more unlikely there will be a breakthrough. According to Bloomberg, an EU diplomat has revealed that informal discussions ahead of this week’s talks have yielded no shift in positions.”

“The developments strongly suggest that there is an increasing risk that the state of Brexit negotiations could deteriorate first before any hope of a last minute compromise deal emerges. It poses downside risks for the pound in the month ahead.”