With UK and EU negotiators currently locked in what many deem to be make-or-break negotiations to thrash out a post-Brexit trade deal before the end of the year, jitters around the outcome have started to creep back into the market after Britain’s exit from the bloc mostly took a back seat amid the chaos caused by the coronavirus pandemic.
Key sticking points in the negotiations including the rights of EU fishing fleets in UK waters, while the as yet unclear status of the land border in Ireland could also prove a stumbling block for any future UK trade deal with the US.
The talks were also seemingly heading for a setback this morning when multiple EU member states including France, Spain, Italy, Belgium, the Netherlands and Denmark voiced concerns that the European Commission was allowing the UK to extract too many concessions from the bloc.
One of the key indicators of market concern of the negotiations is the value of the pound, which has seen swings in its value this week as talks have gone down to the wire.
OANDA’s Craig Erlam said that volatility in sterling is only likely to pick up from here until more details emerge.
“We’re seeing more and more public commentary coming from the talks which may reflect increasing frustrations, or final attempts to draw concessions against the threat of no deal”, Erlam said, adding that while negotiations seem to be going down the wire a risk of a no-deal was probably unlikely.
“I do remain confident that talks won’t collapse this late in the day given the issues that remain. It would be a huge failure on all sides to choose no deal over compromise at this point and I am optimistic that common sense will prevail. They’re just leaving final compromises until a minute to midnight. It’s just not clear to the rest of us when midnight is, given the need for any deal to be ratified”, he said.
However, others are less optimistic, with AJ Bell’s Russ Mould saying that investors ” may soon be giving more serious thought to the prospect of no deal this year, and then potentially another round of negotiations in 2021 where the UK could be in a weaker bargaining position”.
“This would be a complete turnaround of events given how so many people thought we were on the cusp of striking a deal, thereby ending the year on a more positive note alongside the vaccine news”, he added.
COVID-19 vaccine could offset post-Brexit slump
Meanwhile, analysts at ING have said that the chance of any deal “will come down to UK politics”.
“While Covid-19 and polling on Scottish Independence could push the government towards a deal, it will face steep opposition from some pro-Brexit UK MPs”, the Dutch bank said on Thursday.
“Deal or not, there will be disruption at the start of 2021, although unprecedented volatility associated with Covid-19 potentially means we won’t see negative [first quarter] GDP”, ING added.
The bank also said that while such a sharp change in trading terms between the UK and the EU will weigh on the economy and jobs, this “should be offset by a rapid vaccination programme due to start within days”.
“The hope is that this can foster a sustained rebound in GDP through 2021, albeit we don’t expect the economy to reach pre-virus levels for at least a couple of years”, the analysts added.
As of mid-afternoon trading on Thursday, sterling was trading around 0.76% higher at US$1.346 against the dollar.