With only weeks left before the hoped-for end of November deadline for the EU to approve a draft Brexit treaty, it appears Brexit talks are unraveling once again, after Theresa’s May’s hard-won concession to allow the entire UK to remain in the EU customs union should trade negotiations fall apart during the post-Brexit day transition period, members of her own conservative party are showing her exactly what they think of what was supposed to be a game-changing breakthrough.
Three days after Joe Johnson (brother of notorious former Foreign Secretary Boris Johnson) resigned as minister of transport after lambasting May for leading the UK toward an “incoherent Brexit that would leave us trapped in a subordinate relationship with the EU.” Johnson warned that the UK was on the brink of “the greatest crisis since World War II,” and that “so great is the gulf now between what was promised in the referendum campaign and what is on offer” that another “people’s vote” should be held to allow the public to weigh in. Johnson also encouraged ministers to “mutiny” against the prime minister, who he said was on the verge of “total surrender to Brussels.” After Johnson’s shocking call for what would be, in effect, a second Brexit referendum, something that even pro-remainers in the Labour Party have been reluctant to discuss given its implications for, well, democracy, four more pro-remain ministers are on the brink of resigning.
All of this has revived talk that the UK might be headed for a “no-deal” Brexit when Brexit Day arrives on March 29. In the EU, ministers have failed to agree on a Brexit meeting later this month, shifting expectations for the next summit to December.
Given that progress on the deal remains effectively stalled, May has abandoned plans for another emergency cabinet meeting on Monday, where they were supposed to have reviewed the details of a finished draft agreement. Since the outline deal likely won’t be ready by Tuesday, the likelihood that an EU summit will be called to review the final agreement by the end of the month has significantly diminished.
The pound has slipped back below $1.29 on the news, erasing all of its November gains, while the euro has tumbled to a 16-month low. UK bond yields have also fallen.
- GBP/USD drops 1% to $1.2841, the lowest since Nov. 1, before paring decline; the currency weakened against all of its G-10 peers.
- EUR/USD drops as much as 0.9% to 1.1240, lower a fourth day; sovereign name that supported the common currency in late October due to holding a double no-touch structure was absent Monday as option seems to have expired, a Europe-based trader says; stops were filled below 1.1300, with focus now on 1.1187, the 61.8% Fibonacci retracement of gains since early 2017.
- As pressure mounted on May to abandon her proposal or face defeat in Parliament, U.K. 10-year bond yields fell 6bps to 1.43%, lowest this month, as chances of a Bank of England rate hike before Nov. 2019 receded.
The pronounced drop in the euro caught the eye of traders given that Brexit fears have mostly been contained to the pound in recent months. However, one analyst offered an explanation peppered with toungue-in-cheek humor: Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo, said that speculation around the many possible outcomes for Brexit has become so complicated, that it has become difficult to predict where GBP/USD will end up. So, more traders are taking out their Brexit-related frustrations on the euro.
Meanwhile, chief EU trade negotiator Michel Barnier said later on Monday that no EU summit would be called.
According to the FT, the latest round of frustrations are rooted in the EU’s push to get Britain to accept stringent environmental targets and European oversight of state aid rules as part of the “backstop” plan. Apparently, too many members of May’s conservative party fear that, if trade negotiations falter during the transition, that the UK will be left trapped within the customs union, in an essentially diminished relationship as the EU continues to dominate rulemaking without any input from the EU.
Once again, senior UK government aides are whispering that they’re increasingly “pessimistic” about the chances of the deal getting done given Brussel’s stringent demands. “They are pushing and pushing on everything,” the aide told the FT. This cabinet meeting has now been pushed back three times – on Thursday, Saturday and Monday.
As has been the case for the past two weeks, the controversy surrounding the backstop is that, as it stands, the provision would allow the UK to remain in the customs union after the end of the Brexit transition period in December 2020, at least until a new trade agreement can be forged. But Brexiteers in May’s party refuse to accept any outcome that could leave the UK within the customs union permanently, and negotiations over a mechanism to ensure that this doesn’t happen have largely led nowhere.
Meanwhile, March 29 and the possibility of a “no-deal” Brexit are looming ever-larger, which if nothing else is making Steve Eisman’s (of “The Big Short” fame) decision to unveil his short against UK banks last week look surprisingly timely.
Other analysts, for their part, say that a credible backstop proposal is practically the only thing that can save the pound in the near-term, as fading chances for a Brexit deal are also dampening expectations for a late-2019 rate hike by the Bank of England.
“The pound is likely to continue to trade with increased volatility this week,” Lee Hardman, analyst at MUFG, says in a note to clients. “Given that the remainder of the draft EU deal is apparently ‘95% done,’ if a credible proposal to the backstop is announced this week, it could yet send the pound higher again.”
“PM May will continue to have to fight every step of the way to get her proposal through first her party, then parliament, before it even makes its way across the channel,” said Nick Twidale, chief operating officer for Rakuten Securities Australia Pty in Sydney. “Anything that seems to be slowing the process will lead to further downside for the pound.”
Given these assessments, it appears that the pound could retrace even more of its gains from the past few weeks, which saw it ride groundswell of what has now been revealed to be unjustified optimism higher.
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