This weekend is shaping up to be absolutely, positively, possibly, maybe the final ultimate definitive deadline for talks between the U.K. and the European Union (EU) to reach a Brexit trade deal. Tongue-in-cheek comments aside, recent headlines and British pound price action both suggest that the odds of a no-deal exit have materially risen.
U.K. Prime Minister Boris Johnson has warned U.K. businesses to prepare to leave the EU’s single market without a deal, and European Commission President Ursula von der Leyen warned that a no-deal split with the U.K. is the likeliest outcome on Dec. 31. Moreover, EU leaders only spent 10 minutes discussing Brexit at their all-night summit yesterday.
Of course, there are still many in the markets that see all of this as posturing. While the British pound is down sharply this past week, it is still much higher than where it was earlier this year when hard Brexit risks were also acute. This relatively small move to the downside likely reflects Brexit fatigue and the belief that all this saber rattling is just part of the process to try to squeeze out final compromises before finally reaching a deal. Further, Brexit history is filled with deadlines that never came to fruition, leading some analysts to talk about another extension to the deadline or even the possibility of a temporary deal to extend the transition period.
Ultimately, uncertainty remains high around Brexit talks, as illustrated by the premium to hedge against sterling losses for the next three weeks sitting around its highest levels since the 2016 Brexit referendum. The one thing that is known is that there is significant gap risk for sterling this weekend. In the case that a no-deal exit comes to fruition, markets are looking for sterling to make a move toward the mid to low 1.20s on the interbank market. Conversely, if there is a skinny deal, the pound should pop higher, but the bias is still to fade this relief rally, as the pound should start to weaken again once markets refocus on the negative consequences of the deal. While a skinny deal is better than no deal, it still represents a significant disruption. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- The U.S. approved Pfizer’s COVID-19 vaccine, with the shot expected to be available starting Monday.
- U.S. fiscal stimulus talks remain stalled, with differences on liability protections and aid to state and local governments key obstacles.
- The U.S. plans to impose sanctions on Turkey in response to Turkey’s purchase of S-400 missiles. Meanwhile, the EU will expand the list of Turks on the travel ban and asset freeze lists over energy exploration issues in the eastern Mediterranean.
- The EU finally came to an agreement on its $2.2 trillion budget and stimulus package. While this was always the expected outcome, officially approving the package removes a key tail risk that was hanging over the markets.
- Reserve Bank of New Zealand pushed back on adding housing prices to its mandate. In a statement to New Zealand’s finance minister, the central bank warned that incorporating housing prices would result in higher interest rates, lower employment and below-target inflation.
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