Pound Sterling Steadies vs. Euro & Dollar, Report says EU and UK Likely to Reach Breakthrough on Food Exports

– GBP sell-off subsiding
– Reports of a major Brexit impasse can be resolved soon
– Remain bearish GBP, says Rabobank

Euro against pound

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The British pound firmed mid-week on suggestions from analysts that the currency has absorbed its full portion of bad news for now, reporting that the EU and the UK could see a breakthrough in terms of food exports.

UK food exports to the EU have been an unexpected focal point for both sides. The UK has pushed controversial laws to ensure the EU can never block UK food exports to Northern Ireland.

The move has angered the EU and caused the market to increase the likelihood of a no-deal Brexit by the end of the year, which in turn contributed to the largest one-week drop in sterling in the last week since March.

Nick Gutteridge, a Brussels freelance reporter who contributes to all of the UK's major newspapers and has a flawless track record of Brexit negotiation developments, says the food export issue appears to be on the way to being resolved:

"Behind the scenes, the listing of third countries or the series of 'food blockades' isn't quite as dramatic. The EU wants the UK to follow up on animal and plant health (SPS) details by the end of next month Announces Brexit Britain says it will, and they are basically the same as they are now. "

The Hygiene and plant protection measures (SPS) are a detailed set of rules that third countries have to comply with if they want to export food to the EU.

The news of real potential for progress on the SPS in the coming weeks could resolve a major source of tension between the EU and the UK as an argument about the SPS rules has been adding to heightened tensions in the past few days, what in turn adversely affected the value of Sterling.

"The EU wants this information so that it knows the conditions under which its farmers can export goods to the UK from January 1st. This is a prerequisite for opening its market to UK agricultural products and is required by every third country on the List, "says Gutteridge.

The pound has stabilized this week as markets appear to have absorbed much of the political developments and recalibrated their expectations of a deal between the two sides. The pound to euro exchange rate this week is up 0.80% to 1.0885, the pound to dollar exchange rate is up 0.80% this week to 1.290 and the pound to Australian dollar exchange rate is up 0.30 % increased to 1.7624.

An EU official told Gutteridge that the UK has committed to implementing the official control regulation that gives the Commission "with amendments" powers to oversee the agri-food supply chain and EU animal and plant health rules. You are now waiting for national legislation.

"You won't have to wait long," said Gutteridge, quoting a UK spokesman who said that legislation implementing OCR under UK law will be presented to Parliament next month. "The UK is committed to upholding the highest standards of animal welfare and biosecurity. Our future rules will reflect that commitment."

"The EU reserves the judgment until it has seen the fine print, especially the changes to its SPS rules. If everything is in order, the listing can be done in a few days. This now leads to a technocratic exercise, which is the whatever it should be, "says Gutteridge.

The news suggests that a trade deal is still possible despite heightened fears that the two sides are headed for a "no deal".

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Above: The pound is the worst performer over the past month.

Fears heightened last week when the UK tabled the single market draft, which aims to ensure the UK's single market works from early 2021 when the country leaves the Brexit transition period. The aim of the bill is to attempt to repeal some elements of the December 2019 withdrawal agreement between the EU and the UK, leading to interpretations that the UK is indeed willingly violating international law.

The UK says the move is necessary to ensure the future sanctity of the country amid allegations that the EU had negotiated that it could use the readmission agreement to make imports of goods from the rest of the UK into Northern Ireland effective ban if the UK fails should be added to the list of food importers from third countries.

The EU threatened legal action or sanctions if the UK doesn't drop legislation by the end of the month. However, most analysts and political commentators do not believe they will end the negotiations.

"In theory, the EU could break off the trade talks. It won't," said David M. Herszenhorn, Brussels' chief correspondent POLITICO. "If Johnson wants to torpedo the process, he has to do it himself. EU negotiator Michel Barnier will work until the last minute to reach an agreement on all issues without knowing the EU leaders would be the European Parliament ever approve the agreement without the UK undertaking to fully uphold the withdrawal agreement. "

Expect sterling to remain relatively supported as long as EU-UK tensions ease and the two sides keep talking.

If you are expecting a rally in sterling, it should become clear that there is still a deal to be made.

"Beyond the very short term, we would see significantly fewer opportunities for a 'no deal' Brexit than the market seems to imply – the outcome would hurt the UK economy and the Johnson administration has previously used similar negotiating tactics to investors willing to handle short-term volatility, we believe current levels of sterling longs now look attractive, "said Zach Pandl, analyst at Goldman Sachs.

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We reported earlier this week that the EU wanted to postpone a decision on granting EU companies access to the City of London's foreign exchange clearing houses for euro transactions, linking the delay to the controversial issue of the Single Market Act.

However, Tuesday's news pushed those worries aside after the EU announced it would extend access to the city by 18 months.

"The European Commission is preparing to offer its banks an 18-month extension of access to London clearinghouses after the end of the Brexit transition period at the end of the year. Otherwise, EU banks would be forced to take on the potentially disruptive abandonment of business of UK houses next month, although the EU has few alternative venues with sufficient capacity, "says Mathias Van der Jeugt, analyst at KBC markets.

Despite reasons to be cautiously optimistic about the prospect of a Brexit trade deal and, more broadly, the outlook for the pound, foreign exchange analysts have agreed Rabobank say they remain bearish on the currency.

"Although EUR / GBP exceeded our long-term target of 0.92 late last week, we would not rule out further losses for the pound in the current environment and certainly see scope for more volatility," said Jane Foley, senior FX strategist at Rabobank .

"There's been a lot of talk in the market this week that the GBP may have hit the 'top bear' level. The pound has seen a significant sell-off last week and such a move is often followed by a correction. We would however, arguing last week's move was itself a correction of the more constructive arguments that have been made over the past few months about the outlook for GBP, "adds Foley.

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