Sterling rallies as UK and EU agree draft Brexit deal

Ridhima Sharma
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Sterling rallies as UK and EU agree draft Brexit deal

Britain and the EU are on the verge of a Brexit deal after both parties agreed on a text that tackles the Irish border issue, one of the last sticking points in negotiations and the most complicated.

The Sterling rose to $1.3006 this Wednesday, gaining 0.25% as traders reduced bearish bets after Britain and the European Union agreed a preliminary text that would allow the United Kingdom to leave the EU with a deal that avoids a chaotic “hard Brexit” departure.

Yesterday, in the immediate aftermath of the announcement that an exit agreement was reached, sterling rose in value by about 1%, while the FTSE 100 ended the day in modestly negative territory.

The challenge for prime Minister Theresa May is now to sell this deal to the parliament, where hardline Brexit supporters accused her of surrendering to the EU. The British cabinet will meet this afternoon at 14h00 to consider the draft withdrawal agreement.

If the prime minister cannot get the necessary backing, she could face the prospect of being unseated by her party or forced into calling new elections.

On Tuesday night, Jacob Rees-Mogg, leader of the pro-Brexit European Research Group, said he was considering joining other Tory MPs in calling for a vote of no-confidence in May. Boris Johnson, former foreign secretary, claimed May would leave Britain “a vassal state” to the EU. 

Reuters is reporting that the UK and EU will have to decide in July 2020 whether they have a new deal to ensure an open border in Ireland after the transition period ends later that year.

The news agency cites EU sources, who say that if a trade deal is not in place, the UK could choose between extending the transition period once – possibly until the end of 2021 – or going into a “bare-bones” customs arrangement.

The latter, it says, would cover all of the UK, but see closer alignment to EU customs rules and production for Northern Ireland.

Nothing is final yet
The industry is cautious, as the deal might still get derailed.

“This is certainly an achievement of sorts and no one can be under any illusion about how hard it has been to get to this position. But we are not at an end stage yet. The devil will be in the detail of the Irish border issue.

“Everything hangs on that and ultimately whether Theresa May can get this past Parliament. There is a sword of Damocles hanging over Theresa May and it is being wielded by her own MPs.

“She still has to convince them and the rest of Parliament and that’s not a foregone conclusion by any means,” Aberdeen Standard Investments political economist Stephanie Kelly said.

Helal Miah, investment research analyst at The Share Centre, explained what pound’s reaction means.

“Sterling reacted by losing a little value on the back if this release, however the market is more focussed today on developments in Downing Street as the Prime Minister tries to gather support for the Brexit deal negotiated with Europe.

“Sterling has had a choppy few days but on the whole has been rising on optimism that a final deal can be agreed upon. The stock market today is down more in sympathy with global stock market’s fear that an economic slowdown may be coming as oil prices had their biggest fall yesterday for some time, but the fact that inflationary pressures have not increased in the UK left the FTSE 100 to bounce off its session lows.

Advisers are increasingly recommending a cautious investment strategy due to Brexit, according to new research from Canada Life.

“Although we are only a few months away from B-day, the impact remains far from clear. Advisers continue to plan client portfolios that address the known and unknown alike. Invest too much outside the UK and you could miss out on a roaring economy.

Stay in, and potentially watch the value of your clients’ investments fall. With Brexit looming nearer, our research suggests more advisers are likely to take a cautious approach until the impacts are better understood,” Richard Priestley, Executive Director at Canada Life, said.

For Edward Park, deputy chief investment officer at Brooks Macdonald, the DUP could still be a problem for May.

“The DUP and conservative rebels have already made their stance on the draft text clear threatening to derail the tentative agreement before it even reaches the cabinet debate today. Should the cabinet agree to the terms it will appear as a vote before parliament then if a consensus is found there it will be brought into a UK Withdrawal Bill which will again be subject to parliamentary scrutiny.

“It is the Bill stage that poses the greatest risk for the government as that is the time when MPs can attempt to insert their own amendments which could seek to entirely change the future UK/EU relationship agreed in yesterday’s text.

“The European Council and European Parliament will then debate the UK’s bill and the outcome of this is an underappreciated risk given Europe is unlikely to cede much ground if amendments are made by the UK parliament without the EU’s involvement. Markets are struggling to discount two binary options, a Brexit which is relatively soft and pushed down the road or a dramatic no deal result.

For the industy, nothing is final yet until the cabinet and the UK Parliament accept the terms by voting on the final agreement.”

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