Expect significant move by sterling on the countdown to Brexit

Trading in sterling has been volatile, with the currently being moved by the ebb and flow of EU-UK trade talks. File picture

Trading in sterling has been very volatile over the past couple of weeks, albeit while remaining within fairly well-defined trading ranges, with the currency being moved by the ebb and flow of news on the EU-UK trade talks. There is no doubt that there is a fair bit of spin going on regarding the negotiations.

The UK appears anxious to have an agreement concluded soon, having indicated that it would like a deal to be ready for consideration at the EU Summit on October 15. This is not on the cards. The EU has set the end of October as its deadline for a deal, with even talk now that the negotiations could extend into November.

The more upbeat soundings on progress in the talks last week came largely from the UK side. The discussions have yet to enter the so-called “tunnel” stage of intensive detailed negotiations, suggesting there is still some way to go yet on agreeing on the broad parameters of a deal. 

However, UK and EU politicians continue to signal a strong desire to get a deal done. Both sides are keen to avoid the disruption to trade and negative impact on economic activity that the failure to agree a deal would bring in 2021. This would include the imposition of tariffs and quotas on trade in goods between the EU and UK. The negative consequences would be far greater for the UK economy than the EU, given the large share of its exports that go to EU markets.

The very negative impact of Covid-19 on economic activity also increases the pressure to avoid another shock and get a deal done. 

Regardless of the outcome of the talks, though, the end of the current transition period on December 31 will herald a major change in the trading relationship between the EU and UK. The UK will be outside the EU Single Market and Customs Union. Any free trade agreement will be far inferior to the Single Market and involve a lot of extra administration costs for firms.

This is sometimes lost sight of in the current trade discussions. Trade between the EU and UK will not be anywhere near as seamless as now come 2021.

There is plenty of scope for further volatility in sterling in the next month or so and a deal is by no means a guaranteed outcome.  The markets remain cautious, with the euro close to its six-month high versus sterling at around 91 pence. A significant move by the UK currency, though, can be expected over the next few weeks depending on the outcome of the trade negotiations.

Oliver Mangan is chief economist at AIB