Oliver Mangan: Euro may fall only to 86p if Brexit deal is done soon

But the UK currency could fall sharply if it becomes clear that we are heading for no trade deal

The pressure is on to agree an EU-UK trade deal this week, but the performance of sterling has shown that markets are optimistic.

High-level, face-to-face EU-UK trade talks were temporarily suspended last week, with the two teams having to continue their discussions remotely on a virtual basis with the key players off the pitch. 

With Boris Johnson is self-isolating in Downing St and the EU's Brexit chief negotiator self-isolating in Brussels, it is hardly ideal as the trade talks enter their critical final stage, with time running out to get a deal done that can be ratified before the Brexit transition period expires at the end of December.

The markets remain confident that a deal will be struck — that's judging by the performance of sterling, which has been grinding higher.

The euro has fallen below 89p, down significantly from the 93p in September, as sterling gains amid growing confidence that a deal is on the cards.    

It is encouraging that there are large teams on each side working on the details of a possible agreement. 

However, it would seem that the big decisions around state-aid rules, regulatory alignment, a dispute-resolution mechanism, as well as fishing rights still have to be taken.

There have been some positive reports on progress over fishing rights in UK waters. However, it is still unclear if so-called landing zones have been reached on the key contentious issues. 

To seal the deal, it may require political intervention at the top level. The pressure has increased to conclude a trade agreement this week. 

Even then, it may require the UK and EU parliaments to sit over the Christmas period to ratify a deal. This may not be as big an issue now, given that they can meet remotely. 

If a deal is not finalised until early December, then some form of mechanism may have to be found to avoid tariffs kicking in, should an agreement not be ratified and become law by the end of the year.

Our view remains that further upside for sterling is likely to be limited, even if a deal is secured. After all, it has already made good ground in the past couple of months. 

Furthermore, the expectation is that it would be a bare-bones, no tariffs, no quotas deal on goods — far inferior to the current single-market trading regime for goods and services. 

As such, it would have a negative impact on UK growth prospects over the medium-term. Hence, we may see the euro fall only modestly to around 86p against sterling.

On the other hand, the UK currency could fall sharply if it becomes clear that we are heading for no trade deal. Significant gaps remain between the two sides, and so a no-deal outcome cannot be ruled out.

Oliver Mangan is chief economist at AIB