After tumbling to its weakest level against the dollar since August earlier this as S&P warned that recession fears surrounding a hard Brexit could elicit a ratings cut from the influential credit ratings agency, the British pound had been headed for its largest two-day gain since January on reports that UK Prime Minister Theresa May had reached a banking deal to help UK banks maintain their access to EU markets. However, the rally came to an abrupt halt Thursday morning when two anonymous UK officials rubbished the report, saying that no such deal had been reached, and that negotiations between the two sides remain stalled amid the standoff over the Irish border backstop.
Adding to the pain, an assistant to EU chief negotiator said that a final Brexit agreement was still weeks away. “Nothing has changed,” they said.
Circling back to the rumored banking deal, according to the Financial Times, the reports of the “tentative agreement on all aspects of a future partnership on services” regarding banking stirred hopes that a “backstop” deal – which has seemingly been “90%” complete for months now as May struggles with what some analysts are calling “the Brexit Trilemma”, a knot of competing and conflicting interests among different parties in the UK – would include an agreement to protect the City of London’s banking and trading operations from the immediate threat of disruption after March 29, also known as “Brexit day.”
Analysts insist that the only barrier holding the pound back from a breach of the $1.32 level, around where it traded over the summer before investors started to reckon with the fact that negotiations over the final Brexit treaty might prove impossible.
“If the UK and the EU can reach an agreement…[the pound] will rally towards $1.32 before long,” said Qi Gao, foreign exchange strategist at Scotiabank.
Reports of the official denial helped to validate commentary from one FX analyst who cautioned that investors should take the news with a grain of salt.
“This is not the ‘Hail Mary’or ‘Eureka’ moment just yet,” said Jordan Rochester, FX strategist at Nomura.
“It’s good news at the margin, but not a solid sign that a deal is close…just a hint of confidence from Mr Raab that it will be.”
A deal would allow UK-based banks to maintain mostly unfettered access to Continental financial markets without needing to obtain a separate license, though it’s expected that UK banks would continue to be bound to EU banking rules after the Brexit deal is done. With the timeline for a deal pushed back to late November, we wonder if the Bank of England will once again lend its voice to the chorus of critics urging negotiators to ‘get on with it’ and strike a deal before the long-feared economic and market chaos arrives.
GBP/USD trimmed its advance to trade at $1.2867, up just 0.8% on the day, after earlier rising as much as 1.2% to 1.2920.
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