UK and EU make progress on Brexit

Vince De Castro

Orbex senior executive Vince De Castro examines the positive effect on the FX markets as the European Union works alongside the British parliament, charting the progress of Brexit

How will FX brokers avoid a Brexit black swan volatility?

By Vince De Castro, Head of Marketing, Orbex

News reports last week showed that Britain and the European Union were making progress with Brexit talks which had, until recently, stalled. According to the reports, the UK and the EU are said to have made progress in reaching a financial settlement over the UK’s decision to leave the EU.

However, negotiations are said to continue before finalizing the agreement. which also requires the backing of the various EU member states.
The financial settlement issue has been one of the main factors involved in stalling the Brexit talks.

Officials from the EU initially expected the UK to pay an amount of 60 billion euros, based on the past pledges made by the UK to the European Union. This was a major obstacle to the Brexit talks, leading to no progress regarding trade talks.

Another factor affecting the Brexit talks progress has been finalizing the hard border with Ireland. EU officials want the UK to implement hard borders between Northern Ireland and the Republic of Ireland.

EU officials stated that; unless there is sufficient progress on the settlement, dubbed as the Brexit divorce bill, as well as the Ireland Border, further talks will be put on hold.

The British Prime Minister, Theresa May, said that the UK will leave the European Union in March 2019 and said that her government will stand by its payments of 20 billion euro to the EU in the two years leading to 2020. The talks progressed after last week when British officials stated that the government was ready to spend additional amounts, in order to move the talks to future trade with the EU.

Following the release of the news, the British pound was seen trading stronger, rising by as much as 0.70% to reach 1.341 against the U.S. dollar marking a three month high. Strong gains were registered against the euro as well.

The positive developments saw traders bringing forward the rate hike expectations from the Bank of England. The BoE had hiked interest rates by 25 basis points to 0.50% but signaled that rate hikes would be gradual and cautious.

Although the initial reports do not suggest anything concrete with the deal yet to be finalized, the market reaction showed that investors are closely keeping an eye on the BoE’s rate hike plans.

The UK officials were seen working behind the scenes to resolve the deadlock. However, the final agreement will have to be ratified by all the 27 EU member states.

Theresa May is expected to visit Brussels on Monday for talks with the European Commission president Jean-Claude Juncker, as well as the EU’s chief negotiator, Michael Barnier. EU officials maintain that Monday would be the deadline for the UK to offer concessions that will open the door for the trade talks with the EU from March 2019.

However, further progress on the talks remain shaky, especially with Theresa May seen standing on weaker ground, both at home and abroad. After calling for snap elections, Ms. May’s plans backfired as her party lost a substantial number of votes and overall confidence.

EU officials have repeatedly called for more clarity from the UK on it’s commitments, and clearly state that no numbers have been finalized as of yet.

The official agreement, including the numbers, is expected to come at any time during the week.

The European Union has maintained that the UK should stand by its promises made in the past, which also includes contribution to the budget framework, pension liabilities and budget spending. The EU has also pledged aid to countries such as Ukraine and Turkey for which Britain had signed up for during its time with the EU.

The next main Brexit talks are scheduled to be held on December 14th and 15th.

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