The EU has reached an agreement with UK Prime Minister May’s negotiating team, with specifics (400 pages thereof) not yet publicly available and not entirely clear, though the deal would include a UK-wide “backstop” deal that keeps all of the UK – not just Northern Ireland – in the customs union for another 20 months beyond the transition period (end 2021) should further negotiations on the UK/EU trade relationship remain at an impasse.
This was one of the main sticking points and other details will emerge, but for now the focus is on whether enough of May’s cabinet will remain on her side to keep the process moving – a refusal to approve the deal would indicate they view it as highly unlikely that the deal can pass parliament and immediately sets a pressure cooker of activity in motion: emergency negotiations to mitigate the impact of no-deal Brexit, a scrambling for whether and when new snap elections might be called, etc…
On the other hand, the cabinet approving the deal could suggest they see a path to approval in parliament and inspire a chunky sterling rally. There may be sufficient votes from Labour leavers and Tory hardliners to hold their noses and vote in favour of the deal provided there is sufficient room to allow a renegotiation of terms beyond the end of the transition period. As well, the Tory hardliners will have to assess whether a failure to move forward jeopardises Brexit as it potentially sets in motion a second referendum. If we find out already today that the cabinet will not vote to approve the deal, the temperature will rise very quickly as emergency negotiations will then have to proceed to mitigate the impact of a no-deal Brexit.
The all-important cabinet meeting is set to start at 14:00 GMT today.
Chart: EURGBP weekly
Zooming out to the weekly chart for EURGBP, we get a sense of where things might head in the event of a chaotic, no-deal Brexit and if a cabinet approval, eventual November 24-25 summit, and UK parliamentary approval. That path points to the pre-Brexit highs in EURGBP near 0.8000 in our view over the coming months. An immediate sense that this deal will fail and lead to a proper no-deal Brexit, on the other hand could provide far more immediate and up-front volatility back toward 0.9200+. The Bank of England has helped to backstop the GBP downside potential by promising to maintain a hawkish stance in the even of a no-deal Brexit (on the risk of inflation, but I would argue what they really mean is the risk of that inflation coming from a sharply weaker currency).